UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-15637
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
Delaware | 91-1962278 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
3003 Tasman Drive, Santa Clara, California | 95054-1191 | |
(Address of principal executive offices) | (Zip Code) |
(408) 654-7400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 31, 2009, 33,172,636 shares of the registrants common stock ($0.001 par value) were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. | INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except par value and share data) |
June 30,
2009 |
December 31,
2008 * |
||||||
Assets |
||||||||
Cash and due from banks |
$ | 3,246,560 | $ | 1,789,311 | ||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
462,810 | 647,414 | ||||||
Investment securities |
2,638,380 | 1,786,100 | ||||||
Loans, net of unearned income |
4,844,253 | 5,506,253 | ||||||
Allowance for loan losses |
(110,473 | ) | (107,396 | ) | ||||
Net loans |
4,733,780 | 5,398,857 | ||||||
Premises and equipment, net of accumulated depreciation and amortization |
30,196 | 30,589 | ||||||
Goodwill |
| 4,092 | ||||||
Accrued interest receivable and other assets |
354,161 | 361,917 | ||||||
Total assets |
$ | 11,465,887 | $ | 10,018,280 | ||||
Liabilities and total equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 5,551,226 | $ | 4,419,965 | ||||
Negotiable order of withdrawal (NOW) |
31,719 | 58,133 | ||||||
Money market |
1,178,716 | 1,213,086 | ||||||
Foreign money market |
29,832 | 53,123 | ||||||
Time |
356,781 | 379,200 | ||||||
Sweep |
1,846,309 | 1,349,965 | ||||||
Total deposits |
8,994,583 | 7,473,472 | ||||||
Short-term borrowings |
31,340 | 62,120 | ||||||
Other liabilities |
205,113 | 175,553 | ||||||
Long-term debt |
909,641 | 995,423 | ||||||
Total liabilities |
10,140,677 | 8,706,568 | ||||||
Commitments and contingencies (Note 12) |
||||||||
SVBFG stockholders equity: |
||||||||
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding |
| | ||||||
Preferred stock, Series B Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation value per share, 235,000 shares authorized; 235,000 shares issued and outstanding, net of discount |
222,391 | 221,185 | ||||||
Common stock, $0.001 par value, 150,000,000 shares authorized; 33,142,568 and 32,917,007 shares outstanding, respectively |
33 | 33 | ||||||
Additional paid-in capital |
86,478 | 66,201 | ||||||
Retained earnings |
705,847 | 709,726 | ||||||
Accumulated other comprehensive income (loss) |
4,470 | (5,789 | ) | |||||
Total SVBFG stockholders equity |
1,019,219 | 991,356 | ||||||
Noncontrolling interests |
305,991 | 320,356 | ||||||
Total equity |
1,325,210 | 1,311,712 | ||||||
Total liabilities and total equity |
$ | 11,465,887 | $ | 10,018,280 | ||||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for December 31, 2008 have been revised. |
See accompanying notes to interim consolidated financial statements (unaudited).
3
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(Dollars in thousands, except per share amounts) | 2009 | 2008 * | 2009 | 2008 * | |||||||||||
Interest income: |
|||||||||||||||
Loans |
$ | 84,248 | $ | 84,515 | $ | 172,499 | $ | 174,274 | |||||||
Investment securities: |
|||||||||||||||
Taxable |
16,794 | 14,586 | 31,645 | 28,356 | |||||||||||
Non-taxable |
1,029 | 1,078 | 2,090 | 2,015 | |||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
2,485 | 3,684 | 4,861 | 7,801 | |||||||||||
Total interest income |
104,556 | 103,863 | 211,095 | 212,446 | |||||||||||
Interest expense: |
|||||||||||||||
Deposits |
5,605 | 5,372 | 12,452 | 10,641 | |||||||||||
Borrowings |
7,270 | 11,695 | 15,451 | 24,231 | |||||||||||
Total interest expense |
12,875 | 17,067 | 27,903 | 34,872 | |||||||||||
Net interest income |
91,681 | 86,796 | 183,192 | 177,574 | |||||||||||
Provision for loan losses |
21,393 | 8,351 | 64,859 | 16,074 | |||||||||||
Net interest income after provision for loan losses |
70,288 | 78,445 | 118,333 | 161,500 | |||||||||||
Noninterest income: |
|||||||||||||||
Foreign exchange fees |
7,617 | 7,961 | 15,083 | 15,805 | |||||||||||
Deposit service charges |
6,590 | 6,056 | 13,413 | 11,947 | |||||||||||
Client investment fees |
5,580 | 13,648 | 11,828 | 27,370 | |||||||||||
Letters of credit and standby letters of credit income |
2,329 | 3,142 | 5,221 | 6,088 | |||||||||||
Credit card fees |
2,957 | 1,502 | 4,396 | 3,202 | |||||||||||
Corporate finance fees |
| | | 3,640 | |||||||||||
(Losses) gains on derivative instruments, net |
(2,847 | ) | 4,408 | (1,033 | ) | 7,007 | |||||||||
(Losses) gains on investment securities, net |
(6,750 | ) | 2,039 | (41,795 | ) | (4,073 | ) | ||||||||
Other |
12,799 | 5,759 | 15,581 | 15,281 | |||||||||||
Total noninterest income |
28,275 | 44,515 | 22,694 | 86,267 | |||||||||||
Noninterest expense: |
|||||||||||||||
Compensation and benefits |
46,894 | 50,059 | 95,174 | 103,840 | |||||||||||
Professional services |
11,258 | 9,132 | 23,338 | 17,933 | |||||||||||
FDIC assessments |
8,589 | 700 | 11,264 | 1,136 | |||||||||||
Premises and equipment |
5,473 | 5,455 | 10,880 | 10,643 | |||||||||||
Net occupancy |
4,836 | 4,342 | 9,141 | 8,690 | |||||||||||
Business development and travel |
3,152 | 3,764 | 6,425 | 7,186 | |||||||||||
Impairment of goodwill |
| | 4,092 | | |||||||||||
Correspondent bank fees |
1,963 | 1,816 | 3,876 | 3,322 | |||||||||||
Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes |
| 3,858 | | 3,858 | |||||||||||
(Reduction of) provision for unfunded credit commitments |
(1,147 | ) | 800 | (3,431 | ) | 635 | |||||||||
Other |
7,994 | 7,263 | 15,393 | 13,383 | |||||||||||
Total noninterest expense |
89,012 | 87,189 | 176,152 | 170,626 | |||||||||||
Income (loss) before income tax expense |
9,551 | 35,771 | (35,125 | ) | 77,141 | ||||||||||
Income tax expense |
7,174 | 16,291 | 4,726 | 34,639 | |||||||||||
Net income (loss) before noncontrolling interests |
2,377 | 19,480 | (39,851 | ) | 42,502 | ||||||||||
Net loss attributable to noncontrolling interests |
8,961 | 1,534 | 42,954 | 5,752 | |||||||||||
Net income attributable to SVBFG |
$ | 11,338 | $ | 21,014 | $ | 3,103 | $ | 48,254 | |||||||
Preferred stock dividend and discount accretion |
(3,545 | ) | | (7,081 | ) | | |||||||||
Net income (loss) available to common stockholders |
$ | 7,793 | $ | 21,014 | $ | (3,978 | ) | $ | 48,254 | ||||||
Earnings (loss) per common sharebasic |
$ | 0.24 | $ | 0.66 | $ | (0.12 | ) | $ | 1.50 | ||||||
Earnings (loss) per common sharediluted |
0.24 | 0.61 | (0.12 | ) | 1.40 |
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for the three and six months ended June 30, 2008 have been revised. |
See accompanying notes to interim consolidated financial statements (unaudited).
4
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) | 2009 | 2008 * | 2009 | 2008 * | ||||||||||||
Net income (loss) before noncontrolling interests |
$ | 2,377 | $ | 19,480 | $ | (39,851 | ) | $ | 42,502 | |||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Cumulative translation gains (losses): |
||||||||||||||||
Foreign currency translation gains (losses) |
889 | (606 | ) | (542 | ) | (704 | ) | |||||||||
Related tax (expense) benefit |
(153 | ) | 249 | 212 | 288 | |||||||||||
Change in unrealized gains (losses) on available-for-sale investment securities: |
||||||||||||||||
Unrealized holding gains (losses) |
11,591 | (18,020 | ) | 17,859 | (13,064 | ) | ||||||||||
Related tax (expense) benefit |
(4,719 | ) | 7,393 | (7,290 | ) | 5,348 | ||||||||||
Reclassification adjustment for realized gains included in net income (loss) |
41 | 515 | 34 | 1,336 | ||||||||||||
Related tax (expense) benefit |
(17 | ) | (211 | ) | (14 | ) | (548 | ) | ||||||||
Other comprehensive income (loss), net of tax |
7,632 | (10,680 | ) | 10,259 | (7,344 | ) | ||||||||||
Comprehensive income (loss) |
10,009 | 8,800 | (29,592 | ) | 35,158 | |||||||||||
Net loss attributable to noncontrolling interests |
8,961 | 1,534 | 42,954 | 5,752 | ||||||||||||
Comprehensive income attributable to SVBFG |
$ | 18,970 | $ | 10,334 | $ | 13,362 | $ | 40,910 | ||||||||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for the three and six months ended June 30, 2008 have been revised. |
See accompanying notes to interim consolidated financial statements (unaudited).
5
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)
SVBFG Stockholders | ||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock |
Additional Paid-in |
Retained |
Accumulated
Other Comprehensive |
Total SVBFG
Stockholders |
Noncontrolling | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Shares | Amount | Shares | Amount | Capital | Earnings | (Loss) Income | Equity | Interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2007 * |
| $ | | 32,670,557 | $ | 33 | $ | 13,167 | $ | 669,459 | $ | (6,290 | ) | $ | 676,369 | $ | 240,102 | $ | 916,471 | |||||||||||||||||||
Common stock issued under employee benefit plans, net of restricted stock cancellations |
| | 586,438 | | 15,890 | | | 15,890 | | 15,890 | ||||||||||||||||||||||||||||
Income tax benefit from stock options exercised, vesting of restricted stock and other |
| | | | 3,370 | | | 3,370 | | 3,370 | ||||||||||||||||||||||||||||
Net income (loss) |
| | | | | 48,254 | | 48,254 | (5,752 | ) | 42,502 | |||||||||||||||||||||||||||
Capital calls and (distributions), net |
| | | | | | | | 57,025 | 57,025 | ||||||||||||||||||||||||||||
Net change in unrealized losses on available-for-sale investment securities, net of tax |
| | | | | | (6,928 | ) | (6,928 | ) | | (6,928 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax |
| | | | | | (416 | ) | (416 | ) | | (416 | ) | |||||||||||||||||||||||||
Proceeds from cash exercise of call option on zero-coupon convertible subordinated notes |
| | | | 3,858 | | | 3,858 | | 3,858 | ||||||||||||||||||||||||||||
Net cost of convertible note hedge and warrant agreement related to our 3.875% convertible senior notes |
| | | | (20,550 | ) | | | (20,550 | ) | | (20,550 | ) | |||||||||||||||||||||||||
Income tax benefit from original issue discount related to our zero-coupon convertible subordinated notes and 3.875% convertible senior notes |
| | | | 9,402 | | | 9,402 | | 9,402 | ||||||||||||||||||||||||||||
Common stock repurchases |
| | (1,004,628 | ) | (1 | ) | (12,322 | ) | (33,294 | ) | | (45,617 | ) | | (45,617 | ) | ||||||||||||||||||||||
Stock-based compensation expense under SFAS 123(R) |
| | | | 7,397 | | | 7,397 | | 7,397 | ||||||||||||||||||||||||||||
Other-net |
| | | | 542 | (15 | ) | | 527 | | 527 | |||||||||||||||||||||||||||
Balance at June 30, 2008 * |
| $ | | 32,252,367 | $ | 32 | $ | 20,754 | $ | 684,404 | $ | (13,634 | ) | $ | 691,556 | $ | 291,375 | $ | 982,931 | |||||||||||||||||||
Balance at December 31, 2008 * |
235,000 | $ | 221,185 | 32,917,007 | $ | 33 | $ | 66,201 | $ | 709,726 | $ | (5,789 | ) | $ | 991,356 | $ | 320,356 | $ | 1,311,712 | |||||||||||||||||||
Common stock issued under employee benefit plans, net of restricted stock cancellations |
| | 225,561 | | 2,654 | | | 2,654 | | 2,654 | ||||||||||||||||||||||||||||
Income tax expense from stock options exercised, vesting of restricted stock and other |
| | | | (1,369 | ) | | | (1,369 | ) | | (1,369 | ) | |||||||||||||||||||||||||
Net income (loss) |
| | | | | 3,103 | | 3,103 | (42,954 | ) | (39,851 | ) | ||||||||||||||||||||||||||
Capital calls and (distributions), net |
| | | | | | | | 28,589 | 28,589 | ||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale investment securities, net of tax |
| | | | | | 10,589 | 10,589 | | 10,589 | ||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax |
| | | | | | (330 | ) | (330 | ) | | (330 | ) | |||||||||||||||||||||||||
Income tax benefit from original issue discount related to our 3.875% convertible senior notes |
| | | | 10,739 | | | 10,739 | | 10,739 | ||||||||||||||||||||||||||||
Stock-based compensation expense under SFAS 123(R) |
| | | | 7,758 | | | 7,758 | | 7,758 | ||||||||||||||||||||||||||||
Preferred stock dividend and discount accretion |
| 1,206 | | | | (7,081 | ) | | (5,875 | ) | | (5,875 | ) | |||||||||||||||||||||||||
Other-net |
| | | | 495 | 99 | | 594 | | 594 | ||||||||||||||||||||||||||||
Balance at June 30, 2009 |
235,000 | $ | 222,391 | 33,142,568 | $ | 33 | $ | 86,478 | $ | 705,847 | $ | 4,470 | $ | 1,019,219 | $ | 305,991 | $ | 1,325,210 | ||||||||||||||||||||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for December 31, 2007, June 30, 2008, and December 31, 2008 have been revised. |
See accompanying notes to interim consolidated financial statements (unaudited).
6
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, | ||||||||
(Dollars in thousands) | 2009 | 2008 * | ||||||
Cash flows from operating activities: |
||||||||
Net (loss) income before noncontrolling interests |
$ | (39,851 | ) | $ | 42,502 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||
Impairment of goodwill |
4,092 | | ||||||
Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes |
| 3,858 | ||||||
Provision for loan losses |
64,859 | 16,074 | ||||||
(Reduction of) provision for unfunded credit commitments |
(3,431 | ) | 635 | |||||
Changes in fair values of derivatives, net |
1,449 | 471 | ||||||
Losses on investment securities, net |
41,795 | 4,073 | ||||||
Depreciation and amortization |
15,370 | 14,784 | ||||||
Tax benefit of original issue discount |
10,745 | 1,567 | ||||||
Tax (expense) benefit of share-based compensation and other |
(1,436 | ) | 1,584 | |||||
Amortization of share-based compensation |
7,743 | 7,470 | ||||||
Amortization of deferred warrant-related loan fees |
(4,375 | ) | (3,944 | ) | ||||
Deferred income tax (benefit) expense |
(6,647 | ) | 10,824 | |||||
Losses on sale of and valuation adjustments to other real estate owned property |
107 | 296 | ||||||
Changes in other assets and liabilities: |
||||||||
Accrued interest, net |
(4,021 | ) | (2,507 | ) | ||||
Accounts receivable |
(3,840 | ) | (686 | ) | ||||
Income tax receivable, net |
(24,458 | ) | (8,681 | ) | ||||
Accrued compensation |
(11,003 | ) | (30,864 | ) | ||||
Foreign exchange spot contracts, net |
33,914 | (423 | ) | |||||
Other, net |
5,076 | (9,184 | ) | |||||
Net cash provided by operating activities |
86,088 | 47,849 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of available-for-sale securities |
(1,071,073 | ) | (282,175 | ) | ||||
Proceeds from sales of available-for-sale securities |
189 | 2,915 | ||||||
Proceeds from maturities and pay downs of available-for-sale securities |
244,141 | 134,144 | ||||||
Purchases of nonmarketable securities (cost and equity method accounting) |
(30,168 | ) | (22,161 | ) | ||||
Proceeds from sales of nonmarketable securities (cost and equity method accounting) |
2,120 | 3,554 | ||||||
Proceeds from nonmarketable securities (cost and equity method accounting) |
| 889 | ||||||
Purchases of nonmarketable securities (investment fair value accounting) |
(31,067 | ) | (56,048 | ) | ||||
Proceeds from sales of nonmarketable securities (investment fair value accounting) |
5,307 | 19,976 | ||||||
Net decrease (increase) in loans |
597,309 | (498,096 | ) | |||||
Proceeds from recoveries of charged-off loans |
2,129 | 4,827 | ||||||
Proceeds from sale of other real estate owned |
693 | | ||||||
Purchases of premises and equipment |
(6,811 | ) | (4,188 | ) | ||||
Net cash used for investing activities |
(287,231 | ) | (696,363 | ) | ||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
1,521,111 | 252,377 | ||||||
Repayments of other long-term debt |
(50,885 | ) | (543 | ) | ||||
Proceeds from issuance of long-term debt |
8,032 | | ||||||
(Decrease) increase in short-term borrowings |
(30,780 | ) | 240,000 | |||||
Net payments for settlement of zero-coupon convertible subordinated notes |
| (149,732 | ) | |||||
Proceeds from the issuance of 3.875% convertible senior notes, note hedge and warrant, net of issuance costs |
| 222,686 | ||||||
Capital contributions from noncontrolling interests, net of distributions |
28,589 | 57,025 | ||||||
Stock compensation related tax benefits |
61 | 2,034 | ||||||
Dividends paid on preferred stock |
(4,994 | ) | | |||||
Proceeds from issuance of common stock and Employee Stock Purchase Plan |
2,654 | 15,890 | ||||||
Repurchases of common stock |
| (45,617 | ) | |||||
Net cash provided by financing activities |
1,473,788 | 594,120 | ||||||
Net increase (decrease) in cash and cash equivalents |
1,272,645 | (54,394 | ) | |||||
Cash and cash equivalents at beginning of period |
2,436,725 | 683,174 | ||||||
Cash and cash equivalents at end of period |
$ | 3,709,370 | $ | 628,780 | ||||
Supplemental disclosures: |
||||||||
Cash paid during the period for: |
||||||||
Interest paid |
$ | 28,569 | $ | 33,978 | ||||
Income taxes paid |
27,312 | 28,540 | ||||||
Noncash items during the period: |
||||||||
Preferred stock dividends accrued, not yet paid |
$ | 1,469 | $ | | ||||
Expense associated with loans issued under the Employee Home Ownership Program |
764 | 462 | ||||||
Unrealized gains (losses) on available-for-sale securities |
10,569 | (7,716 | ) | |||||
Net change in fair value of interest rate swaps |
(44,403 | ) | 781 |
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for the six months ended June 30, 2008 have been revised. |
See accompanying notes to interim consolidated financial statements (unaudited).
7
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
SVB Financial Group (SVB Financial or the Parent) is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients through all stages of their life cycles. In these notes to our interim consolidated financial statements, when we use or refer to SVB Financial Group, SVBFG, the Company, we, our, us or other similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the Bank), unless the context requires otherwise. When we use or refer to SVB Financial or the Parent we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.
The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (GAAP). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of results to be expected for any future periods. These interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).
The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data-Note 2-Summary of Significant Accounting Policies under Part II, Item 8 of our 2008 Form 10-K, and with the accounting pronouncements adopted during the six months ended June 30, 2009, as discussed below.
The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include the valuation of non-marketable securities, the adequacy of the allowance for loan losses, valuation of equity warrant assets, the recognition and measurement of income tax assets and liabilities, the adequacy of the reserve for unfunded credit commitments, and share-based compensation.
Principles of Consolidation and Presentation
Our consolidated interim financial statements include the accounts of SVB Financial Group and our majority-owned subsidiaries and variable interest entities (VIEs) for which we are the primary beneficiary. There have been no significant changes during the six months ended June 30, 2009 to our majority-owned subsidiaries and VIEs. Refer to our Consolidated Financial Statements and Supplementary Data-Note 2-Summary of Significant Accounting Policies under Part II, Item 8 of our 2008 Form 10-K.
Impact of Adopting SFAS No. 160
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Our adoption of SFAS No. 160 on January 1, 2009 required us to reclassify our presentation of noncontrolling interests (formerly referred to as minority interests) in our financial statements and had no effect on our results of operations or stockholders equity.
Impact of Adopting SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires companies with derivative instruments to provide enhanced disclosure information that should enable financial statement users to better understand how and why a company uses derivative instruments, how derivative instruments
8
and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and how derivative instruments and related hedged items affect a companys financial position, financial performance and cash flows. Our adoption of SFAS No. 161 on January 1, 2009 required us to expand our disclosures for our derivative financial instruments. Please refer to Note 9- Derivative Financial Instruments for further details.
Impact of Adopting FSP APB No. 14-1
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1). The FSP requires the proceeds from the issuance of convertible debt instruments to be allocated between a liability and an equity component in a manner that reflects the entitys non-convertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. Our adoption on January 1, 2009 required historical financial statements for 2007 and 2008 to be retrospectively adjusted to conform to the FSPs new accounting treatment for both our $150 million zero-coupon convertible subordinated notes (2003 Convertible Notes), which matured on June 15, 2008, and our $250 million 3.875% convertible senior notes (2008 Convertible Notes), due April 15, 2011.
As a result of adopting the requirements of FSP APB No. 14-1, our net income (loss) available to common stockholders for the three and six months ended June 30, 2009 decreased by $0.3 million and $0.6 million, respectively. Details of certain items revised in prior periods related to the adoption of FSP APB No. 14-1 are provided below under the section Changes to Prior Period Balances.
Impact of Adopting FSP SFAS No. 157-4
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP No. 157-4). FSP No. 157-4 provides guidance to highlight and expand on factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset or liability. FSP No. 157-4 also provides guidance on identifying circumstances that may indicate that a transaction is not orderly. Our adoption of FSP No. 157-4 on April 1, 2009 did not have a material effect on our financial position, results of operations or stockholders equity.
Impact of Adopting FSP SFAS No. 115-2 and SFAS No. 124-2
In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (OTTI) (FSP No. 115-2 and SFAS No. 124-2). FSP No. 115-2 and SFAS No. 124-2 change the methodology for determining whether OTTI exists for debt securities. FSP No. 115-2 and SFAS No. 124-2 require changes to the presentation of OTTI impairment in the statements of income for those impairments involving credit losses, as well as enhanced disclosures regarding the methodology and significant inputs used to measure the amount related to credit losses. Our adoption of FSP No. 115-2 and SFAS No. 124-2 on April 1, 2009 did not have a material effect on our financial position, results of operations or stockholders equity, but required us to update our significant accounting policy for available-for-sale debt securities, to include the specific requirements of FSP No. 115-2 and SFAS No. 124-2. Specifically within our accounting policy for available-for-sale debt securities, we have updated the policy for assessing and evaluating OTTI, to include the following: (a) an assertion of whether we have the intent to sell the impaired debt security or will more likely than not be required to sell the debt security prior to its anticipated recovery, (b) in the event that we do not expect to recover the securitys entire amortized cost, we will recognize in earnings the portion of OTTI related to credit losses, with the remainder recognized in other comprehensive income.
Impact of Adopting FSP SFAS No. 107-1 and APB No. 28-1
In April 2009, the FASB issued FSP SFAS No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP No. 107-1 and APB No. 28-1), which require interim disclosures regarding the fair values of all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments , as well as the methods and significant assumptions used to estimate the fair value of those financial instruments. Our adoption of FSP No. 107-1 and APB No. 28-1 on April 1, 2009 required us to expand our interim disclosures of all financial instruments and had no effect on our financial position, results of operations or stockholders equity. Please refer to Note 14- Fair Value of Financial Instruments for further details.
Impact of Adopting SFAS No. 165
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Our adoption of SFAS No. 165 on July 1, 2009 required us to disclose the date through which we have evaluated subsequent events had no effect on our results of operations or stockholders equity.
Correction of an Immaterial Error
During the second quarter of 2009, we determined that we had incorrectly recognized certain gains and losses on foreign exchange contracts in prior periods. The cumulative pre-tax effect of the error was $6.2 million, or $3.8 million after-tax and is considered to be immaterial to the prior periods. However, since the cumulative impact of correcting this error would be material to
9
the results of the quarter ended June 30, 2009, we applied the guidance of Staff Accounting Bulletin No. 108,
Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current Year Financial Statements
(SAB 108). This guidance requires that prior financial statements be corrected, even though such revisions were, and continue to be, immaterial to
the prior period financial statements. As such, the affected prior period results have been revised as follows: For the three months ended March 31, 2009, net loss increased by $1.2 million, or $0.04 per diluted common share; for the year ended
December 31, 2008, net income was reduced by $2.3 million, or $0.07 per diluted common share; and for the year ended December 31, 2007, net income was reduced by $0.2 million, or $0.01 per diluted common share. Details of the revisions are
Changes to Prior Period Balances
The table below highlights certain items revised in prior periods related to the revision of certain immaterial gains and losses on foreign exchange contracts that were incorrectly recorded in prior periods and to the adoption of FSP APB No. 14-1:
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentations.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140 (SFAS No. 166). SFAS No. 166 defines the term participating interest to establish specific conditions for reporting a transfer of a
10
portion of a financial asset as a sale. SFAS No. 166 also removes the concept of a qualifying special-purpose entity for accounting purposes. SFAS No. 166 is effective for interim or annual financial periods ending after November 15, 2009. We are currently assessing the impact of SFAS No. 166 on our consolidated financial position and results of operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FIN 46(R) (SFAS No. 167). SFAS No. 167 replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling interest in a VIE, with an approach focused on which enterprise has both the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant. SFAS No. 167 is effective for interim or annual financial periods beginning after November 15, 2009. We are currently assessing the impact of SFAS No. 167 on our consolidated financial position and results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles-a replacement of SFAS No. 162 (SFAS No. 168). The FASB Accounting Standards Codification TM (Codification) will become the source of authoritative GAAP recognized by the FASB. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for interim or annual financial periods ending after September 15, 2009. SFAS No. 168 will not have any impact on our consolidated financial position and results of operations, but will have an impact on how we reference and disclose accounting literature in our interim and annual reports.
2. Stockholders Equity and Earnings Per Share (EPS)
Common Stock
We did not repurchase any shares of our common stock for the three or six months ended June 30, 2009. We repurchased 1.0 million shares for the six months ended June 30, 2008 totaling $45.6 million. In July 2008 upon expiration of our earlier stock repurchase program, our Board of Directors approved a stock repurchase program authorizing us to purchase up to $150.0 million of our common stock, which expires on December 31, 2009; however, we are subject to certain stock repurchase restrictions in connection with our participation in the U.S. Treasurys (Treasury) Capital Purchase Program (the CPP). At June 30, 2009, $150.0 million of shares remain authorized for repurchase under our current stock repurchase program.
Preferred Stock
In connection with our participation in the CPP in the fourth quarter of 2008, for the six months ended June 30, 2009, we have paid or accrued dividends of $5.9 million on our Series B Fixed Rate Cumulative Perpetual Preferred Stock (Series B Preferred Stock). At December 31, 2008, accrued dividends were $0.6 million.
Earnings Per Share
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, our Employee Stock Purchase Plan, restricted stock awards and units, our 2003 Convertible Notes and related warrants, which matured in June 2008, our 2008 Convertible Notes and related warrants and note hedge, and our warrant under the CPP. Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2009 and 2008:
11
Three months ended June 30, | Six months ended June 30, | |||||||||||||
(Dollars and shares in thousands, except per share amounts) |
2009 | 2008 | 2009 | 2008 | ||||||||||
Numerator: |
||||||||||||||
Net income attributable to SVBFG |
$ | 11,338 | $ | 21,014 | $ | 3,103 | $ | 48,254 | ||||||
Preferred stock dividend and discount accretion |
(3,545 | ) | | (7,081 | ) | | ||||||||
Net income (loss) available to common stockholders |
$ | 7,793 | $ | 21,014 | $ | (3,978 | ) | $ | 48,254 | |||||
Denominator: |
||||||||||||||
Weighted average common shares outstanding-basic |
32,952 | 32,054 | 32,960 | 32,167 | ||||||||||
Weighted average effect of dilutive securities: |
||||||||||||||
Stock options |
126 | 968 | | 984 | ||||||||||
Restricted stock awards and units |
| 87 | | 38 | ||||||||||
2003 Convertible Notes |
| 1,083 | | 1,158 | ||||||||||
Denominator for diluted calculation |
33,078 | 34,192 | 32,960 | 34,347 | ||||||||||
Net income (loss) per common share: |
||||||||||||||
Basic |
$ | 0.24 | $ | 0.66 | $ | (0.12 | ) | $ | 1.50 | |||||
Diluted |
$ | 0.24 | $ | 0.61 | $ | (0.12 | ) | $ | 1.40 | |||||
Due to the net loss applicable to common stockholders for the six months ended June 30, 2009, no potentially dilutive shares were included in the net loss per share calculation as including such shares would be anti-dilutive and reduce the reported net loss per share.
The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three and six months ended June 30, 2009 and 2008:
Three months ended June 30, | Six months ended June 30, | |||||||
(Shares in thousands) |
2009 | 2008 | 2009 | 2008 | ||||
Stock options |
2,893 | 939 | 3,031 | 933 | ||||
Restricted stock awards and units |
583 | 2 | 714 | 1 | ||||
Warrant associated with Capital Purchase Program |
707 | | 862 | | ||||
Total |
4,183 | 941 | 4,607 | 934 | ||||
In addition to the above, at June 30, 2009, 4.7 million shares of our 2008 Convertible Notes and associated warrants were outstanding but not included in the calculation of diluted earnings per common share because the exercise price was higher than the market price, and therefore were antidilutive. Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement. For information on our 2008 Convertible Notes and associated convertible note hedge and warrant agreement, see our Consolidated Financial Statements and Supplementary Data-Note 9- Derivative Financial Instruments and Note 12- Short-Term Borrowings and Long-Term Debt under Part II, Item 8 of our 2008 Form 10-K.
3. Share-Based Compensation
For the three and six months ended June 30, 2009, we recorded share-based compensation expense of $3.9 million and $7.8 million, respectively, resulting in the recognition of $0.9 million and $1.9 million, respectively, in related tax benefits. For the three and six months ended June 30, 2008, we recorded share-based compensation expense of $3.8 million and $7.4 million, respectively, resulting in the recognition of $1.0 million and $1.7 million, respectively, in related tax benefits.
Unrecognized Compensation Expense
At June 30, 2009, unrecognized share-based compensation expense was as follows:
(Dollars in thousands) |
Unrecognized Expense |
Average Expected
Recognition Period - in Years |
|||
Stock options |
$ | 9,288 | 1.93 | ||
Restricted stock units |
11,752 | 1.54 | |||
Total unrecognized share-based compensation expense |
$ | 21,040 | |||
12
Share-Based Payment Award Activity
The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2009:
Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life in Years |
Aggregate
Intrinsic Value of In-The- Money Options |
||||||||
Outstanding at December 31, 2008 |
3,130,929 | $ | 37.25 | ||||||||
Granted |
521,930 | 21.42 | |||||||||
Exercised |
(20,291 | ) | 11.54 | ||||||||
Forfeited |
(8,367 | ) | 47.96 | ||||||||
Expired |
(22,604 | ) | 36.76 | ||||||||
Outstanding at June 30, 2009 |
3,601,597 | 35.08 | 3.66 | $ | 6,885,462 | ||||||
Vested and expected to vest at June 30, 2009 |
3,431,082 | 35.19 | 3.53 | 6,288,447 | |||||||
Exercisable at June 30, 2009 |
2,548,766 | 34.93 | 2.67 | 3,784,425 | |||||||
The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $27.22 as of June 30, 2009. The total intrinsic value of options exercised during the three and six months ended June 30, 2009 was $32 thousand and $0.2 million, respectively, compared to $5.2 million and $8.6 million for the comparable 2008 periods.
The table below provides information for restricted stock awards and restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2009:
Shares |
Weighted Average
Grant Date Fair Value |
|||||
Nonvested at December 31, 2008 |
393,463 | $ | 46.49 | |||
Granted |
125,470 | 23.75 | ||||
Vested |
(94,324 | ) | 20.94 | |||
Forfeited |
(5,594 | ) | 24.52 | |||
Nonvested at June 30, 2009 |
419,015 | 45.73 | ||||
4. Federal Funds Sold, Securities Purchased under Agreements to Resell and Other Short-Term Investment Securities
The following table details the federal funds sold, securities purchased under agreements to resell and other short-term investment securities at June 30, 2009 and December 31, 2008, respectively:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | ||||
Federal funds sold overnight |
$ | 100,000 | $ | 250,000 | ||
Securities purchased under agreements to resell |
140,624 | 150,910 | ||||
Interest-earning deposits |
184,275 | 169,022 | ||||
Other short-term investment securities |
37,911 | 77,482 | ||||
Total federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
$ | 462,810 | $ | 647,414 | ||
In addition to the above, as of June 30, 2009 and December 31, 2008, $3.0 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate.
13
5. Investment Securities
The major components of our investment securities portfolio at June 30, 2009 and December 31, 2008 are as follows:
June 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||
(Dollars in thousands) |
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Carrying
Value |
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Carrying
Value |
||||||||||||||||||
Marketable securities: |
||||||||||||||||||||||||||
Available-for-sale securities, at fair value: |
||||||||||||||||||||||||||
U.S. Treasury securities |
$ | 25,671 | $ | 306 | $ | | $ | 25,977 | $ | | $ | | $ | | $ | | ||||||||||
U.S. agency debentures |
700,412 | 4,952 | (348 | ) | 705,016 | 109,981 | 3,622 | | 113,603 | |||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||||
Agency-issued mortgage-backed securities |
412,739 | 12,165 | (516 | ) | 424,388 | 438,688 | 9,910 | (4 | ) | 448,594 | ||||||||||||||||
Agency-issued collateralized mortgage obligations |
745,135 | 11,999 | (519 | ) | 756,615 | 478,397 | 5,354 | (476 | ) | 483,275 | ||||||||||||||||
Non-agency mortgage-backed securities |
109,989 | 3 | (13,928 | ) | 96,064 | 133,561 | 255 | (18,486 | ) | 115,330 | ||||||||||||||||
Commercial mortgage-backed securities |
51,350 | | (3,512 | ) | 47,838 | 54,202 | | (6,721 | ) | 47,481 | ||||||||||||||||
Municipal bonds and notes |
102,862 | 1,094 | (991 | ) | 102,965 | 109,405 | 1,384 | (2,034 | ) | 108,755 | ||||||||||||||||
Marketable equity securities |
278 | 1 | (4 | ) | 275 | 157 | | (5 | ) | 152 | ||||||||||||||||
Venture capital fund investments |
| 1 | | 1 | | 1 | | 1 | ||||||||||||||||||
Total available-for-sale securities |
$ | 2,148,436 | $ | 30,521 | $ | (19,818 | ) | $ | 2,159,139 | $ | 1,324,391 | $ | 20,526 | $ | (27,726 | ) | $ | 1,317,191 | ||||||||
Marketable securities (investment company fair value accounting) (1) |
547 | 1,703 | ||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||||||||||||
Private equity fund investments (2) |
225,892 | 242,645 | ||||||||||||||||||||||||
Other private equity investments (3) |
84,613 | 82,444 | ||||||||||||||||||||||||
Other investments (4) |
1,348 | 1,547 | ||||||||||||||||||||||||
Non-marketable securities (equity method accounting): |
||||||||||||||||||||||||||
Other investments (5) |
42,238 | 27,000 | ||||||||||||||||||||||||
Low income housing tax credit funds |
29,217 | 31,510 | ||||||||||||||||||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||||||||||||
Private equity fund investments (6) |
82,279 | 69,971 | ||||||||||||||||||||||||
Other private equity investments |
13,107 | 12,089 | ||||||||||||||||||||||||
Total investment securities |
$ | 2,638,380 | $ | 1,786,100 | ||||||||||||||||||||||
(1) | Marketable securities (investment company fair value accounting) represent investments managed by us or our consolidated subsidiaries that were originally made within our non-marketable securities portfolio that have been converted into publicly-traded shares. The following table shows the amount of investments by the following funds and our ownership of each fund at June 30, 2009 and December 31, 2008: |
June 30, 2009 | December 31, 2008 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Partners for Growth, LP |
$ | 55 | 50.0 | % | $ | 1,233 | 50.0 | % | ||||
SVB India Capital Partners I, LP |
492 | 14.4 | 470 | 14.4 | ||||||||
Total marketable securities |
$ | 547 | $ | 1,703 | ||||||||
(2) | The following table shows the amount of investments by the following consolidated funds of funds and our ownership of each fund at June 30, 2009 and December 31, 2008: |
June 30, 2009 | December 31, 2008 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
SVB Strategic Investors Fund, LP |
$ | 53,110 | 12.6 | % | $ | 65,985 | 12.6 | % | ||||
SVB Strategic Investors Fund II, LP |
81,396 | 8.6 | 94,161 | 8.6 | ||||||||
SVB Strategic Investors Fund III, LP |
87,045 | 5.9 | 80,780 | 5.9 | ||||||||
SVB Strategic Investors Fund IV, LP |
4,341 | 5.0 | 1,719 | 5.0 | ||||||||
Total private equity fund investments |
$ | 225,892 | $ | 242,645 | ||||||||
14
(3) | The following table shows the amount of investments by the following consolidated co-investment funds and our ownership of each fund at June 30, 2009 and December 31, 2008: |
June 30, 2009 | December 31, 2008 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Silicon Valley BancVentures, LP |
$ | 22,451 | 10.7 | % | $ | 24,188 | 10.7 | % | ||||
SVB Capital Partners II, LP (i) |
37,290 | 5.1 | 38,234 | 5.1 | ||||||||
SVB India Capital Partners I, LP |
24,872 | 14.4 | 20,022 | 14.4 | ||||||||
Total other private equity investments |
$ | 84,613 | $ | 82,444 | ||||||||
(i) | At June 30, 2009, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership interest of SVB Strategic Investors Fund II, LP. |
(4) | Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP, a consolidated sponsored debt fund. At June 30, 2009 and December 31, 2008 we had a majority ownership interest of approximately 50.0% in the fund. Partners for Growth, LP is managed by a third party, and we do not have an ownership interest in the general partner of this fund. |
(5) | The following table shows the amount of investments by the following debt funds and our ownership of each fund at June 30, 2009 and December 31, 2008: |
June 30, 2009 | December 31, 2008 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Gold Hill Venture Lending 03, LP (i) |
$ | 16,144 | 9.3 | % | $ | 18,234 | 9.3 | % | ||||
Partners for Growth II, LP |
12,454 | 24.2 | 8,559 | 24.2 | ||||||||
Other fund investments |
13,640 | N/A | 207 | N/A | ||||||||
Total other investments |
$ | 42,238 | $ | 27,000 | ||||||||
(i) | At June 30, 2009, we had a direct ownership interest of 4.8% in the fund. In addition, we had a 90.7% direct ownership interest in the funds general partner, Gold Hill Venture Lending Partners 03, LLC (GHLLC). GHLLC has a direct ownership interest of 5.0% in Gold Hill Venture Lending 03, LP and its parallel funds. Our indirect interest in the fund through our investment in GHLLC is 4.5%. Our aggregate direct and indirect ownership in the fund is 9.3%. |
(6) | Represents investments in 352 and 360 private equity funds at June 30, 2009 and December 31, 2008, respectively, where our ownership interest is less than 5% of the voting interests of each such fund. For the three months ended June 30, 2009, we concluded that 21 of our investments had declines in value that were determined to be other than temporary, and as a result, we recognized OTTI losses of $0.7 million. For the six months ended June 30, 2009 we recognized OTTI losses of $1.6 million resulting from other than temporary declines in value for 44 of the 352 investments. The OTTI losses are included in net (losses) gains on investment securities, a component of noninterest income. For the remaining 308 investments at June 30, 2009, we concluded that the declines in value were temporary and as such no OTTI was recognized. At June 30, 2009, the carrying value of these private equity fund investments (cost method accounting) was $82.3 million, and the estimated fair value was $74.1 million. |
The following table summarizes our unrealized losses on our available-for-sale investment securities into categories of less than 12 months, or 12 months or longer, at June 30, 2009:
June 30, 2009 | |||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||
(Dollars in thousands) |
Fair Value of
Investments |
Unrealized
Losses |
Fair Value of
Investments |
Unrealized
Losses |
Fair Value of
Investments |
Unrealized
Losses |
|||||||||||||||
U.S. agency debentures |
$ | 213,472 | $ | (348 | ) | $ | | $ | | $ | 213,472 | $ | (348 | ) | |||||||
Residential mortgage-backed securities: |
|||||||||||||||||||||
Agency-issued mortgage-backed securities |
24,312 | (516 | ) | | | 24,312 | (516 | ) | |||||||||||||
Agency-issued collateralized mortgage obligations (1) |
81,626 | (496 | ) | 4,397 | (23 | ) | 86,023 | (519 | ) | ||||||||||||
Non-agency mortgage-backed securities (1) |
13,872 | (279 | ) | 79,692 | (13,649 | ) | 93,564 | (13,928 | ) | ||||||||||||
Commercial mortgage-backed securities (1) |
| | 47,838 | (3,512 | ) | 47,838 | (3,512 | ) | |||||||||||||
Municipal bonds and notes (1) |
21,149 | (404 | ) | 17,947 | (587 | ) | 39,096 | (991 | ) | ||||||||||||
Marketable equity securities |
3 | (4 | ) | | | 3 | (4 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 354,434 | $ | (2,047 | ) | $ | 149,874 | $ | (17,771 | ) | $ | 504,308 | $ | (19,818 | ) | ||||||
(1) |
As of June 30, 2009, we identified a total of 109 investments that were in unrealized loss positions, of which 54 investments totaling $149.9 million with unrealized losses of $17.8 million have been in an impaired position for a period of time greater than 12 months. The time periods in which these securities were originally purchased were as follows: Agency-issued collateralized mortgage obligations between May 2002 and March 2003, non-agency mortgage-backed securities between June 2003 and July |
15
2005, commercial mortgage-backed securities between April 2005 and July 2005 and municipal bonds and notes between December 2007 and February 2008. All investments with unrealized losses for a period of time greater than 12 months are considered investment grade by either Moodys or S&P or were issued by a government sponsored enterprise. The unrealized losses are due primarily to increases in market interest rate or increase in market spreads to benchmark interest rates relative to rates and spreads at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell any of our securities prior to recovery of our adjusted cost basis and as of June 30, 2009, it is more likely than not that we will not be required to sell any securities prior to recovery of our adjusted cost basis. As a result, all of our other-than-temporary impairments as of June 30, 2009 are included in other comprehensive income. Market valuations and impairment analyses on assets in the investment securities portfolio are reviewed and monitored on an ongoing basis. |
The following table summarizes our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer, as of December 31, 2008:
December 31, 2008 | |||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||
(Dollars in thousands) |
Fair Value of
Investments |
Unrealized
Losses |
Fair Value of
Investments |
Unrealized
Losses |
Fair Value of
Investments |
Unrealized
Losses |
|||||||||||||||
U.S. agency debentures |
$ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Residential mortgage-backed securities: |
|||||||||||||||||||||
Agency-issued mortgage-backed securities |
| | 5,076 | (4 | ) | 5,076 | (4 | ) | |||||||||||||
Agency-issued collateralized mortgage obligations |
13,559 | (88 | ) | 44,327 | (388 | ) | 57,886 | (476 | ) | ||||||||||||
Non-agency mortgage-backed securities |
44,751 | (4,237 | ) | 64,386 | (14,249 | ) | 109,137 | (18,486 | ) | ||||||||||||
Commercial mortgage-backed securities |
9,491 | (404 | ) | 37,990 | (6,317 | ) | 47,481 | (6,721 | ) | ||||||||||||
Municipal bonds and notes |
39,694 | (1,827 | ) | 4,091 | (207 | ) | 43,785 | (2,034 | ) | ||||||||||||
Marketable equity securities |
152 | (5 | ) | | | 152 | (5 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 107,647 | $ | (6,561 | ) | $ | 155,870 | $ | (21,165 | ) | $ | 263,517 | $ | (27,726 | ) | ||||||
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of June 30, 2009. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent. The weighted average yield is computed using the amortized cost of debt securities, which are reported at fair value. Expected remaining maturities of U.S. treasury securities, U.S. agency securities and mortgage-backed securities may differ significantly from their contractual maturities because borrowers have the right to prepay obligations with or without penalties. This is most apparent in mortgage-backed securities as contractual maturities are typically 15 to 30 years, whereas expected average lives of these securities are significantly shorter and vary based upon structure.
June 30, 2009 | ||||||||||||||||||||||||||||||
Total |
One Year
or Less |
After One
Year to Five Years |
After Five
Years to to Ten Years |
After
Ten Years |
||||||||||||||||||||||||||
(Dollars in thousands) |
Carrying
Value |
Weighted-
Average Yield |
Carrying
Value |
Weighted-
Average Yield |
Carrying
Value |
Weighted-
Average Yield |
Carrying
Value |
Weighted-
Average Yield |
Carrying
Value |
Weighted-
Average Yield |
||||||||||||||||||||
U.S. Treasury securities |
$ | 25,977 | 2.06 | % | $ | | | % | $ | 25,977 | 2.06 | % | $ | | | % | $ | | | % | ||||||||||
U.S. agency debentures |
705,016 | 2.30 | 111,197 | 0.47 | 475,184 | 1.96 | 118,635 | 5.37 | | | ||||||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||||||||
Agency-issued mortgage-backed securities |
424,388 | 4.77 | | | 2,597 | 6.30 | 71,930 | 4.22 | 349,861 | 4.88 | ||||||||||||||||||||
Agency-issued collateralized mortgage obligations |
756,615 | 4.18 | | | | | 84,984 | 4.48 | 671,631 | 4.14 | ||||||||||||||||||||
Non-agency mortgage-backed securities |
96,064 | 4.83 | | | | | 22,452 | 4.74 | 73,612 | 4.85 | ||||||||||||||||||||
Commercial mortgage-backed securities |
47,838 | 4.67 | | | | | | | 47,838 | 4.67 | ||||||||||||||||||||
Municipal bonds and notes |
102,965 | 3.76 | 4,814 | 1.46 | 5,045 | 3.03 | 24,799 | 3.49 | 68,307 | 4.06 | ||||||||||||||||||||
Total |
$ | 2,158,863 | 3.68 | $ | 116,011 | 0.51 | $ | 508,803 | 2.00 | $ | 322,800 | 4.69 | $ | 1,211,249 | 4.41 | |||||||||||||||
The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities for the three and six months ended June 30, 2009 and 2008:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Gross gains on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
$ | | $ | 139 | $ | 7 | $ | 205 | ||||||||
Marketable securities (investment company fair value accounting) |
691 | 612 | 1,179 | 612 | ||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
654 | 6,715 | 1,269 | 16,815 | ||||||||||||
Other private equity investments |
141 | 3,722 | 193 | 5,440 | ||||||||||||
Other investments |
249 | 155 | 613 | 155 | ||||||||||||
Non-marketable securities (equity method accounting): |
||||||||||||||||
Other investments |
2,245 | 1,162 | 2,809 | 1,531 | ||||||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
235 | 126 | 301 | 410 | ||||||||||||
Other private equity investments |
| 81 | 22 | 81 | ||||||||||||
Total gross gains on investment securities |
4,215 | 12,712 | 6,393 | 25,249 | ||||||||||||
Gross losses on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
(41 | ) | (654 | ) | (41 | ) | (1,541 | ) | ||||||||
Marketable securities (investment company fair value accounting) |
(197 | ) | (13 | ) | (393 | ) | (1,926 | ) | ||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
(5,950 | ) | (8,432 | ) | (36,760 | ) | (15,749 | ) | ||||||||
Other private equity investments |
(2,883 | ) | (880 | ) | (8,032 | ) | (2,533 | ) | ||||||||
Other investments |
| | | (5,514 | ) | |||||||||||
Non-marketable securities (equity method accounting): |
||||||||||||||||
Other investments |
(1,163 | ) | (2 | ) | (1,283 | ) | (1,093 | ) | ||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
(701 | ) | (434 | ) | (1,649 | ) | (708 | ) | ||||||||
Other private equity investments |
(30 | ) | (258 | ) | (30 | ) | (258 | ) | ||||||||
Total gross losses on investment securities |
(10,965 | ) | (10,673 | ) | (48,188 | ) | (29,322 | ) | ||||||||
(Losses) gains on investment securities, net |
$ | (6,750 | ) | $ | 2,039 | $ | (41,795 | ) | $ | (4,073 | ) | |||||
(Losses) gains attributable to noncontrolling interests, including carried interest |
$ | (6,933 | ) | $ | 452 | $ | (37,371 | ) | $ | (1,447 | ) | |||||
16
6. Loans and Allowance for Loan Losses
The composition of loans, net of unearned income of $41.8 million and $45.4 million at June 30, 2009 and December 31, 2008, respectively, is presented in the following table:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | ||||
Commercial loans |
$ | 3,895,631 | $ | 4,515,019 | ||
Premium wine (1) |
400,237 | 419,539 | ||||
Community development loans (2) |
57,639 | 48,293 | ||||
Consumer and other (3) |
490,746 | 523,402 | ||||
Total loans, net of unearned income |
$ | 4,844,253 | $ | 5,506,253 | ||
(1) | Premium wine consists of loans for vineyard development as well as working capital and equipment term loans to meet the needs of our clients premium wineries and vineyards. At June 30, 2009 and December 31, 2008, $267.4 million and $269.6 million, respectively, of such loans were secured by real estate. |
(2) | Community development loans consist of low income housing loans made as part of our responsibilities under the Community Reinvestment Act and are primarily secured by real estate. |
(3) | Consumer and other loans consist of loans to targeted high-net-worth individuals. These products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans and capital call lines of credit. This category also includes loans made to eligible employees through our Employee Home Ownership Plan (EHOP). Loans secured by real estate at June 30, 2009, and December 31, 2008 were comprised of the following: |
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | ||||
Home equity lines of credit (i) |
$ | 95,065 | $ | 89,544 | ||
Loans to eligible employees (ii) |
86,307 | 74,759 | ||||
Loans for personal residence (iii) |
61,260 | 58,700 | ||||
Consumer loans secured by real estate |
$ | 242,632 | $ | 223,003 | ||
(i) | Represents home equity lines of credits, which may have been used to finance real estate investments. |
(ii) | Represents loans made to eligible employees through our EHOP. |
(iii) | Represents loans used to purchase, renovate or refinance personal residences. |
The activity in the allowance for loan losses for the three and six months ended June 30, 2009 and 2008 was as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Allowance for loan losses, beginning balance |
$ | 110,010 | $ | 49,636 | $ | 107,396 | $ | 47,293 | ||||||||
Provision for loan losses |
21,393 | 8,351 | 64,859 | 16,074 | ||||||||||||
Gross loan charge-offs |
(21,898 | ) | (9,098 | ) | (63,911 | ) | (15,306 | ) | ||||||||
Loan recoveries |
968 | 3,999 | 2,129 | 4,827 | ||||||||||||
Allowance for loan losses, ending balance |
$ | 110,473 | $ | 52,888 | $ | 110,473 | $ | 52,888 | ||||||||
Nonaccrual Loans
The aggregate investment in loans for which impairment has been determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, totaled $111.4 million and $84.9 million at June 30, 2009 and December 31, 2008, respectively. There were no commitments available for funding to any clients with nonaccrual loans at June 30, 2009 and at December 31, 2008. The allocation of the allowance for loan losses related to impaired loans was $44.6 million and $25.9 million at June 30, 2009 and December 31, 2008, respectively. Our accruing loans past due 90 days or more were $0.1 million and $2.3 million at June 30, 2009 and December 31, 2008, respectively.
7. Goodwill
During the first quarter of 2009, we conducted an assessment of goodwill of eProsper, a data management services company in which we own a 65% interest, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , based on eProspers revised forecast of discounted net cash flows for that reporting unit. We concluded that we had an impairment of goodwill resulting from changes in our outlook for eProspers future financial performance. As a result, $4.1 million of goodwill was expensed as a noncash non tax-deductible charge to continuing operations during the first quarter of 2009. There is no remaining goodwill on our balance sheet as of June 30, 2009, compared to $4.1 million at December 31, 2008.
17
8. Short-Term Borrowings and Long-Term Debt
The following table represents outstanding short-term borrowings and long-term debt at June 30, 2009 and December 31, 2008:
(Dollars in thousands) |
Maturity |
June 30, 2009 | December 31, 2008 | |||||
Short-term borrowings: |
||||||||
Other short-term borrowings |
(1) | $ | 31,340 | $ | 62,120 | |||
Total short-term borrowings |
$ | 31,340 | $ | 62,120 | ||||
Long-term debt: |
||||||||
FHLB advances |
(2) | $ | 50,000 | $ | 100,000 | |||
5.70% senior notes |
June 1, 2012 | 270,583 | 279,370 | |||||
6.05% subordinated notes |
June 1, 2017 | 278,550 | 313,953 | |||||
3.875% convertible senior notes (3) |
April 15, 2011 | 245,876 | 244,783 | |||||
7.0% junior subordinated debentures |
October 15, 2033 | 55,950 | 55,914 | |||||
4.99% long-term notes payable |
(4) | 8,032 | | |||||
8.0% long-term notes payable |
(5) | 650 | 1,403 | |||||
Total long-term debt |
$ | 909,641 | $ | 995,423 | ||||
(1) | Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes. |
(2) | Represents Federal Home Loan Bank (FHLB) advances of $50 million maturing in November 2009. Balance as of December 31, 2008 included $50 million in FHLB advances that matured in May 2009. |
(3) | Balance as of December 31, 2008 reflects a retrospective adjustment resulting from our adoption of FSP APB No. 14-1 on January 1, 2009 (see Note 1- Basis of Presentation). |
(4) | Represents long-term notes payable related to one of our debt fund investments beginning April 30, 2009 with the last payment due in April 2012. |
(5) | Represents long-term notes payable at eProsper and was payable beginning January 1, 2008 with the last payment due in November 2009. SVB purchased a 65% interest in eProsper in 2006. |
Interest expense related to short-term borrowings and long-term debt was $7.3 million and $15.5 million for the three and six months ended June 30, 2009, respectively, and $11.7 million and $24.2 million for the three and six months ended June 30, 2008, respectively. Interest expense shown is net of the cash flow impact from our interest rate swap agreements related to our senior and subordinated notes and junior subordinated debentures. In December 2008, our counterparty called the swap on our junior subordinated debentures for settlement in January 2009. As a result, the swap was terminated and no longer designated as a hedging instrument. Additionally, interest expense for the three and six months ended June 30, 2008 reflects retrospective adjustments resulting from our adoption of FSP APB No. 14-1 on January 1, 2009 (see Note 1- Basis of Presentation).
3.875% Convertible Senior Notes (2008 Convertible Notes)
In April 2008, we issued our 2008 Convertible Notes, due April 15, 2011, in the aggregate principal amount of $250 million to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The issuance costs related to the 2008 Convertible Notes were $6.8 million, and the net proceeds from the offering were $243.2 million. We used $141.9 million of the net proceeds to settle the principal value of our 2003 Convertible Notes, which matured in June 2008, and $20.6 million to purchase a call spread associated with the 2008 Convertible Notes. All remaining proceeds were used or set aside for general corporate purposes. The 2008 Convertible Notes are initially convertible, subject to certain conditions, into cash up to the principal amount of notes and, into shares of our common stock or cash or any combination thereof for any excess conversion value, at our option. Holders may convert their 2008 Convertible Notes beginning any fiscal quarter commencing after June 30, 2008, if: (i) the price of our common stock issuable upon conversion of the note reaches a specific threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the note falls below certain thresholds. The notes have an initial conversion rate of 18.8525 shares of common stock per $1,000 principal amount of notes, which represents an initial effective conversion price of $53.04 per share. Upon maturity, we intend to settle the outstanding principal amount in cash, and we have the option to settle any amount exceeding the principal value of the 2008 Convertible Notes in either cash or shares of our common stock.
Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement (see Note 9- Derivative Financial Instruments), which effectively increased the economic conversion price of our 2008 Convertible Notes to $64.43 per share of common stock. The terms of the hedge and warrant agreement are not part of the terms of the notes and will not affect the rights of the holders of the notes.
18
For the three and six months ended June 30, 2009, the effective interest rate for our 2008 Convertible Notes was 5.73 percent and 5.77 percent, respectively, and interest expense was $3.5 million and $7.0 million, respectively. For the three and six months ended June 30, 2008, the effective interest rate for our 2008 Convertible Notes was 5.60 percent and 5.68 percent, respectively, and interest expense was $3.1 million for each of the three and six months ended June 30, 2008. At June 30, 2009, the unamortized debt discount totaled $4.1 million, and will be amortized over the remaining contractual term of the debt.
Available Lines of Credit
We have certain facilities in place to enable us to access short-term borrowings on a secured (using fixed income securities as collateral) and an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of June 30, 2009, we had not borrowed against our repurchase lines or any of our uncommitted federal funds lines. We also pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco at June 30, 2009 totaled $588.1 million, of which $537.1 million was available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2009 totaled $84.4 million, all of which was unused.
9. Derivative Financial Instruments
We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk, equity market price risk and to assist customers with their risk management objectives. Also, as part of negotiating credit facilities and certain other services, we obtain rights to acquire stock in the form of equity warrant assets in certain client companies.
Interest Rate Risk
Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate-sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk for our 5.70% senior notes and our 6.05% subordinated notes, we entered into fixed-for-floating interest rate swaps at the time of debt issuance.
Concurrent with the issuance of our 5.70% senior notes and 6.05% subordinated notes, we entered into interest rate swap agreements based upon LIBOR with matched-terms. We use the shortcut method to assess hedge effectiveness and evaluate the hedging relationships for qualification under the shortcut method requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended (SFAS No. 133), for each reporting period.
For more information on our 5.70% senior notes and our 6.05% subordinated notes, see our Consolidated Financial Statements and Supplementary Data-Note 12- Short-Term Borrowings and Long-Term Debt under Part II, Item 8 of our 2008 Form 10-K.
Net cash benefits associated with our interest rate swaps are recorded in Interest Expense: Borrowings, a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Increases from changes in fair value are included in Other Assets and decreases from changes in fair value are included in Other Liabilities. Any differences associated with our interest rate swaps that arise as a result of hedge ineffectiveness are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
Currency Exchange Risk
We enter into foreign exchange forward contracts to hedge against exposures of our credit facilities that are denominated in foreign currencies to our clients, primarily in Pound Sterling, Euro, and Japanese Yen. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting under SFAS No. 133. In accordance with SFAS No. 52, Foreign Currency Translation , changes in currency rates are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the economic hedging relationship, because the credit facilities are revalued based upon changes in the currencys spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in Other Assets and loss positions in Other Liabilities, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
Equity Market Price Risk
We have convertible debt instruments that contain conversion options that enable the holders to convert the instruments, subject to certain conditions. Specifically, we currently have outstanding our 2008 Convertible Notes. We intend to settle any conversions in cash up to the principal amount of these notes and, in shares of our common stock or cash or any combination thereof for any excess conversion value, at our option. The conversion option represents an equity risk exposure for the excess conversion value and is an equity derivative classified in stockholders equity. We manage equity market price risk of our convertible debt instruments by entering into convertible note hedge and warrant agreements to increase the economic conversion price of our convertible debt
19
instruments and to decrease potential dilution to stockholders resulting from the conversion option. Similar to the conversion option, the hedge and warrant agreements are equity derivatives classified in stockholders equity.
Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement at a net cost of $20.6 million, which effectively increased the economic conversion price from $53.04 per common share to $64.43. For the six months ended June 31, 2009 and 2008, there were no note conversions or exercises under the warrant agreement as the notes were not convertible. Concurrent with the issuance of our 2003 Convertible Notes, we entered into a convertible note hedge agreement and a warrant agreement at a net cost of $21.9 million, which effectively increased the economic conversion price from $33.63 per common share to $51.34. The 2003 Convertible Notes and associated note hedge and warrant agreement matured on June 15, 2008.
For more information on the 2003 Convertible Notes and the 2008 Convertible Notes, see our Consolidated Financial Statements and Supplementary Data-Note 12- Short-Term Borrowings and Long-Term Debt under Part II, Item 8 of our 2008 Form 10-K.
Other Derivative Instruments
Equity Warrant Assets
Our equity warrant assets are concentrated in private, venture-backed companies in the technology and life science industries. Our warrant agreements contain net share settlement provisions, which permit us to pay the warrant exercise price using shares issuable under the warrant (cashless exercise). Because we can net settle our warrant agreements, our equity warrant assets qualify as derivative instruments. We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. We make valuation adjustments for estimated remaining life and marketability for warrants issued by private companies. Equity warrant assets are recorded at fair value in Other Assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
Other Derivatives
Our consolidated sponsored debt fund may extend credit facilities with options to convert their principal value into the borrowers common stock. These instruments often contain a price range whereby the conversion option may be exercised. As this fund follows fair value accounting, this embedded conversion feature is integrated into the fair value of the debt instrument and does not receive separate accounting recognition. The fair value of these instruments is recorded in Investment Securities with changes in fair value recorded through net gains (losses) in investment securities, in noninterest income, a component of consolidated net income.
We sell forward and option contracts to clients that wish to mitigate their foreign currency exposure. We hedge the currency risk from this business by entering into opposite way contracts with correspondent banks. This hedging relationship does not qualify for hedge accounting. The contracts generally have terms of one year or less, although we may have contracts extending for up to five years. We generally have not experienced nonperformance on these contracts, have not incurred credit losses, and anticipate performance by all counterparties to such agreements. Increases from changes in fair value are included in Other Assets and decreases from changes in fair value are included in Other Liabilities. The net change in the fair value of these contracts is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
Counterparty Credit Risk
We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate.
20
The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at June 30, 2009 and December 31, 2008, respectively, were as follows:
June 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||
(Dollars in thousands) |
Balance sheet
location |
Notional or
contractual amount |
Fair
value |
Collateral |
Net
exposure (1) |
Notional or
contractual amount |
Fair
value |
Collateral |
Net
exposure (1) |
|||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||||||||
Interest Rate Risks: |
||||||||||||||||||||||||||||||
Interest rate swaps |
Other assets | $ | 500,000 | $ | 49,739 | $ | 31,340 | $ | 18,399 | $ | 550,000 | $ | 94,142 | $ | 62,120 | $ | 32,022 | |||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||||
Currency Exchange Risks: |
||||||||||||||||||||||||||||||
Foreign exchange forwards |
Other assets | 16,515 | 925 | | 925 | 50,393 | 4,212 | | 4,212 | |||||||||||||||||||||
Foreign exchange forwards |
Other liabilities | 28,767 | (1,617 | ) | | (1,617 | ) | 23,193 | (1,092 | ) | | (1,092 | ) | |||||||||||||||||
Net exposure |
(692 | ) | | (692 | ) | 3,120 | | 3,120 | ||||||||||||||||||||||
Other Derivative Instruments: |
||||||||||||||||||||||||||||||
Equity warrant assets |
Other assets | 128,066 | 47,704 | | 47,704 | 130,401 | 43,659 | | 43,659 | |||||||||||||||||||||
Other derivatives: |
||||||||||||||||||||||||||||||
Foreign exchange forwards |
Other assets | 304,586 | 20,217 | | 20,217 | 354,399 | 32,476 | | 32,476 | |||||||||||||||||||||
Foreign exchange forwards |
Other liabilities | 303,622 | (20,257 | ) | | (20,257 | ) | 344,703 | (31,039 | ) | | (31,039 | ) | |||||||||||||||||
Foreign currency options |
Other assets | 76,928 | 980 | | 979 | 25,848 | 501 | | 501 | |||||||||||||||||||||
Foreign currency options |
Other liabilities | 76,928 | (980 | ) | | (979 | ) | 25,848 | (501 | ) | | (501 | ) | |||||||||||||||||
Net exposure |
(40 | ) | | (40 | ) | 1,437 | | 1,437 | ||||||||||||||||||||||
Net |
$ | 96,711 | $ | 31,340 | $ | 65,371 | $ | 142,358 | $ | 62,120 | $ | 80,238 | ||||||||||||||||||
(1) | Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of June 30, 2009 remain at A or higher and there have been no material changes in their credit ratings for the six months ended June 30, 2009. |
A summary of our derivative activity and the related impact on our consolidated statements of income for the three and six months ended June 30, 2009 and 2008 is as follows:
Three months
ended June 30, |
Six months
ended June 30, |
|||||||||||||||||
(Dollars in thousands) |
Statement of income location | 2009 | 2008 | 2009 | 2008 | |||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||
Interest Rate Risks: |
||||||||||||||||||
Net cash benefit associated with interest rate swaps |
Interest expense -borrowings | $ | 4,929 | $ | 2,976 | $ | 9,133 | $ | 3,785 | |||||||||
Changes in fair value of interest rate swap |
Net (losses) gains on
derivative instruments |
| 879 | (170 | ) | 386 | ||||||||||||
Net gains associated with interest rate risk derivatives |
$ | 4,929 | $ | 3,855 | $ | 8,963 | $ | 4,171 | ||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||
Currency Exchange Risks: |
||||||||||||||||||
Gains (losses) on foreign currency loan revaluations, net |
Other noninterest income | $ | 4,657 | $ | (1,992 | ) | $ | 1,980 | $ | 1,915 | ||||||||
(Losses) gains on foreign exchange forward contracts, net |
Net (losses) gains on
derivative instruments |
(4,479 | ) | 624 | (2,536 | ) | (2,467 | ) | ||||||||||
Net gains (losses) associated with currency risk |
$ | 178 | $ | (1,368 | ) | $ | (556 | ) | $ | (552 | ) | |||||||
Other Derivative Instruments: |
||||||||||||||||||
Equity warrant assets |
Net (losses) gains on
derivative instruments |
$ | 1,184 | $ | 2,050 | $ | 729 | $ | 7,505 | |||||||||
Gains on client foreign exchange forward contracts, net |
Net (losses) gains on
derivative instruments |
$ | 448 | $ | 478 | $ | 944 | $ | 1,206 | |||||||||
Gains on covered call options, net |
Net (losses) gains on
derivative instruments |
$ | | $ | 377 | $ | | $ | 377 | |||||||||
21
10. Other Noninterest Income and Other Noninterest Expense
A summary of other noninterest income for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(Dollars in thousands) |
2009 | 2008 * | 2009 | 2008 * | |||||||||
Fund management fees |
$ | 2,471 | $ | 1,957 | $ | 5,188 | $ | 3,877 | |||||
Service-based fee income (1) |
2,116 | 2,266 | 3,945 | 4,256 | |||||||||
Gains (losses) on foreign currency loans revaluation, net |
4,657 | (1,992 | ) | 1,980 | 1,915 | ||||||||
Other |
3,555 | 3,528 | 4,468 | 5,233 | |||||||||
Total other noninterest income |
$ | 12,799 | $ | 5,759 | $ | 15,581 | $ | 15,281 | |||||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for the three and six months ended June 30, 2008 have been revised. |
(1) | Includes income from SVB Analytics and eProsper. |
A summary of other noninterest expense for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||
(Dollars in thousands) |
2009 | 2008 | 2009 | 2008 | ||||||||
Telephone |
$ | 1,337 | $ | 1,345 | $ | 2,717 | $ | 2,497 | ||||
Tax credit fund amortization |
1,164 | 1,059 | 2,293 | 2,041 | ||||||||
Data processing services |
1,089 | 1,116 | 2,101 | 2,193 | ||||||||
Postage and supplies |
821 | 1,024 | 2,079 | 1,778 | ||||||||
Other |
3,583 | 2,719 | 6,203 | 4,874 | ||||||||
Total other noninterest expense |
$ | 7,994 | $ | 7,263 | $ | 15,393 | $ | 13,383 | ||||
11. Segment Reporting
We have four operating segments for management reporting purposes: Global Commercial Bank, Relationship Management, SVB Capital, and Other Business Services. Our Other Business Services group includes Sponsored Debt Funds & Strategic Investments and SVB Analytics. The results of our operating segments are based on our internal management reporting process.
Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, our internal management reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure and is not necessarily comparable with similar information for other financial services companies. In addition, changes in an individual clients primary relationship designation have resulted, and in the future may result, in the inclusion of certain clients in different segments in different periods.
An operating segment is separately reportable if it exceeds any one of several quantitative thresholds specified in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information . With respect to our operating segments, only Global Commercial Bank, Relationship Management and SVB Capital were determined to be reportable segments as of June 30, 2009.
The summary financial results of our operating segments are presented along with a reconciliation to our consolidated interim results. The Reconciling Items column reflects the adjustments necessary to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Net interest income in the Reconciling Items column is primarily interest income recognized from our fixed income investment portfolio. Noninterest income in the Reconciling Items column is primarily attributable to noncontrolling interests (formerly referred to as minority interests) and gains (losses) on equity warrant assets. Noninterest expense in the Reconciling Items column primarily consists of expenses associated with corporate support functions such as information technology, finance, human resources, loan and deposit operations, and legal, as well as certain corporate wide adjustments related to compensation expenses. Additionally, average assets in the Reconciling Items column primarily consist of our fixed income investment portfolio balances.
Changes to Segment Reporting Effective January 1, 2009
Effective January 1, 2009, we changed the way we monitor performance and results of our business segments and as a result, we changed how our operating segments are presented. We have reclassified all prior period segment information to conform to the current presentation of our reportable segments. The following is a description of the services that our four operating segments provide:
22
|
Global Commercial Bank provides solutions to the financial needs of commercial clients through lending, deposit products, cash management services, and global banking and trade products and services. It also serves the needs of our non-U.S. clients with global banking products, including loans, deposits and global finance, in key foreign entrepreneurial markets. Previously, the operations of SVB Global were aggregated as a part of Other Business Services. |
|
Relationship Management provides banking products and services to our premium wine industry clients, including vineyard development loans, as well as a range of credit services to targeted high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. Previously, the operations of SVB Wine and SVB Private Client Services were aggregated as part of Other Business Services. |
|
SVB Capital manages venture capital and private equity funds on behalf of SVB Financial Group and other third party limited partners. The SVB Capital family of funds is comprised of funds it manages, including funds of funds, such as our SVB Strategic Investors Funds, and co-investment funds, such as our SVB Capital Partners funds and SVB India Capital Partners fund. Previously, SVB Capital also included our sponsored debt funds, Gold Hill Venture Lending funds, which provide secured debt, typically to emerging-technology clients in their earliest stages, and Partners for Growth funds, which provide secured debt primarily to higher-risk, middle-market clients in their later stages, and certain strategic investments held by SVB Financial. |
|
Other Business Services includes the results of our Sponsored Debt Funds & Strategic Investments segment, which is comprised of our sponsored debt funds, Gold Hill Venture Lending funds and Partners for Growth funds, and certain strategic investments held by SVB Financial. Previously, the operations of our sponsored debt funds and strategic investments were reported as part of the SVB Capital operating segment. Other Business Services also includes the results of SVB Analytics, which provides equity valuation and equity management services to private companies and venture capital firms. |
Effective January 1, 2009, we report Federal Deposit Insurance Corporation (FDIC) assessments in noninterest expense within Global Commercial Bank. Prior to January 1, 2009, FDIC assessments were recognized in noninterest expense under the Reconciling Items column. Additionally, effective January 1, 2009, we report the provision for loan losses by reportable segments. Prior to January 1, 2009, the provision for loan losses was recognized under the Reconciling Items column. All prior periods presented have been revised to reflect these changes.
23
The following table summarizes the key operating results and financial position for each of our business segments, as well as a reconciliation used to arrive at our consolidated totals. We have reclassified all prior period amounts to conform to the current periods presentation.
(Dollars in thousands) |
Global
Commercial Banking |
Relationship
Management |
SVB
Capital (1) |
Other Business
Services (1) |
Reconciling
Items |
Total | ||||||||||||||||||
Three months ended June 30, 2009 |
||||||||||||||||||||||||
Net interest income (loss) |
$ | 90,987 | $ | 8,428 | $ | (1 | ) | $ | (54 | ) | $ | (7,679 | ) | $ | 91,681 | |||||||||
Provision for loan losses |
(14,915 | ) | (6,470 | ) | | | (8 | ) | (21,393 | ) | ||||||||||||||
Noninterest income (loss) |
26,813 | 308 | 2,359 | 2,761 | (3,966 | ) | 28,275 | |||||||||||||||||
Noninterest expense (2) |
(39,308 | ) | (3,525 | ) | (3,290 | ) | (2,933 | ) | (39,956 | ) | (89,012 | ) | ||||||||||||
Income (loss) before income tax expense (3) |
$ | 63,577 | $ | (1,259 | ) | $ | (932 | ) | $ | (226 | ) | $ | (51,609 | ) | $ | 9,551 | ||||||||
Total average loans, net of unearned income |
$ | 3,775,198 | $ | 965,767 | $ | | $ | | $ | 39,001 | $ | 4,779,966 | ||||||||||||
Total average assets |
3,870,134 | 967,229 | 92,621 | 75,723 | 5,922,259 | 10,927,966 | ||||||||||||||||||
Total average deposits |
8,276,795 | 148,296 | | | 7,506 | 8,432,597 | ||||||||||||||||||
Three months ended June 30, 2008 |
||||||||||||||||||||||||
Net interest income |
$ | 78,654 | $ | 7,439 | $ | 17 | $ | 9 | $ | 677 | $ | 86,796 | ||||||||||||
Provision for loan losses |
(8,106 | ) | (241 | ) | | | (4 | ) | (8,351 | ) | ||||||||||||||
Noninterest income |
33,955 | 429 | 2,997 | 3,294 | 3,840 | 44,515 | ||||||||||||||||||
Noninterest expense (2) |
(30,033 | ) | (3,701 | ) | (4,723 | ) | (2,977 | ) | (45,755 | ) | (87,189 | ) | ||||||||||||
Income (loss) before income tax expense (3) |
$ | 74,470 | $ | 3,926 | $ | (1,709 | ) | $ | 326 | $ | (41,242 | ) | $ | 35,771 | ||||||||||
Total average loans, net of unearned income |
$ | 3,342,907 | $ | 882,006 | $ | | $ | | $ | 94,984 | $ | 4,319,897 | ||||||||||||
Total average assets |
3,389,293 | 886,091 | 51,580 | 62,608 | 2,768,458 | 7,158,030 | ||||||||||||||||||
Total average deposits |
4,481,342 | 169,598 | | | (2,117 | ) | 4,648,823 | |||||||||||||||||
Six months ended June 30, 2009 |
||||||||||||||||||||||||
Net interest income (loss) |
$ | 185,246 | $ | 17,315 | $ | (3 | ) | $ | (80 | ) | $ | (19,286 | ) | $ | 183,192 | |||||||||
Provision for loan losses |
(57,730 | ) | (7,119 | ) | | | (10 | ) | (64,859 | ) | ||||||||||||||
Noninterest income (loss) |
53,053 | 611 | 1 | 4,358 | (35,329 | ) | 22,694 | |||||||||||||||||
Noninterest expense (2) |
(71,545 | ) | (7,174 | ) | (6,636 | ) | (9,959 | ) | (80,838 | ) | (176,152 | ) | ||||||||||||
Income (loss) before income tax expense (3) |
$ | 109,024 | $ | 3,633 | $ | (6,638 | ) | $ | (5,681 | ) | $ | (135,463 | ) | $ | (35,125 | ) | ||||||||
Total average loans, net of unearned income |
$ | 3,943,712 | $ | 977,738 | $ | | $ | | $ | 25,730 | $ | 4,947,180 | ||||||||||||
Total average assets |
4,033,681 | 979,350 | 89,113 | 75,012 | 5,516,333 | 10,693,489 | ||||||||||||||||||
Total average deposits |
8,014,766 | 160,411 | | | 6,369 | 8,181,546 | ||||||||||||||||||
Six months ended June 30, 2008 |
||||||||||||||||||||||||
Net interest income (loss) |
$ | 163,303 | $ | 14,847 | $ | 30 | $ | 43 | $ | (649 | ) | $ | 177,574 | |||||||||||
(Provision for) recovery of loan losses |
(16,255 | ) | 214 | | | (33 | ) | (16,074 | ) | |||||||||||||||
Noninterest income |
67,612 | 838 | 5,076 | 1,438 | 11,303 | 86,267 | ||||||||||||||||||
Noninterest expense (2) |
(60,685 | ) | (7,837 | ) | (8,950 | ) | (5,262 | ) | (87,892 | ) | (170,626 | ) | ||||||||||||
Income (loss) before income tax expense (3) |
$ | 153,975 | $ | 8,062 | $ | (3,844 | ) | $ | (3,781 | ) | $ | (77,271 | ) | $ | 77,141 | |||||||||
Total average loans, net of unearned income |
$ | 3,268,139 | $ | 858,464 | $ | | $ | | $ | 89,778 | $ | 4,216,381 | ||||||||||||
Total average assets |
3,318,181 | 862,625 | 44,500 | 64,180 | 2,665,497 | 6,954,983 | ||||||||||||||||||
Total average deposits |
4,381,868 | 165,145 | | | (5,094 | ) | 4,541,919 |
(1) | SVB Capitals and Other Business Services components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. |
(2) | The Global Commercial Bank segment includes direct depreciation and amortization of $0.5 million and $0.7 million for the three months ended June 30, 2009 and 2008, respectively, and $1.2 million and $1.3 million for the six months ended June 30, 2009 and 2008. |
(3) | The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. |
24
12. Off-Balance Sheet Arrangements, Guarantees and Other Commitments
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.
Commitments to Extend Credit
The following table summarizes information related to our commitments to extend credit at June 30, 2009 and December 31, 2008, respectively:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | ||||
Commitments available for funding: (1) |
||||||
Fixed interest rate commitments |
$ | 653,345 | $ | 689,063 | ||
Variable interest rate commitments |
4,310,309 | 4,941,423 | ||||
Total commitments available for funding |
$ | 4,963,654 | $ | 5,630,486 | ||
Commitments unavailable for funding (2) |
$ | 1,038,318 | $ | 922,170 | ||
Maximum lending limits for accounts receivable factoring arrangements (3) |
$ | 497,128 | $ | 476,329 | ||
Reserve for unfunded credit commitments |
11,266 | 14,698 |
(1) | Represents commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants under loan commitment agreements. |
(2) | Represents commitments which are not available for funding, due to clients failing to meet all collateral, compliance, and financial covenants under loan commitment agreements. |
(3) | We extend credit under accounts receivable factoring arrangements when our clients sales invoices are deemed creditworthy under existing underwriting practices. |
As of December 31, 2008, we guaranteed some of our customers credit cards that had been provided by an unaffiliated
financial institution. The total amount of these guarantees at December 31, 2008 was $87.4 million. During the first quarter of 2009, we purchased this credit card portfolio and began processing these credit cards in-house. The credit card
Commercial and Standby Letters of Credit
The table below summarizes our commercial and standby letters of credit at June 30, 2009. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there was a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.
(Dollars in thousands) |
Expires In One
Year or Less |
Expires After
One Year |
Total Amount
Outstanding |
Maximum Amount
of Future Payments |
||||||||
Financial standby letters of credit |
$ | 571,249 | $ | 40,547 | $ | 611,796 | $ | 611,796 | ||||
Performance standby letters of credit |
26,618 | 7,760 | 34,378 | 34,378 | ||||||||
Commercial letters of credit |
5,407 | | 5,407 | 5,407 | ||||||||
Total |
$ | 603,274 | $ | 48,307 | $ | 651,581 | $ | 651,581 | ||||
At June 30, 2009 and December 31, 2008, deferred fees related to commercial and standby letters of credit were $4.7 million and $4.8 million, respectively. At June 30, 2009, collateral in the form of cash of $200.9 million and investment securities of $32.9 million were available to us to reimburse losses, if any, under financial and performance standby letters of credit.
Commitments to Invest in Private Equity Funds
We make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately held companies. Commitments to invest in these funds are generally made for a ten-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the
25
general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years. The actual timing of future cash requirements to fund such commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments, unfunded capital commitments, and our ownership in each fund at June 30, 2009:
Our Ownership in Limited Partnership (Dollars in thousands) |
Capital
Commitments |
Unfunded
Commitments |
Our Ownership
of each Fund |
||||||
Silicon Valley BancVentures, LP |
$ | 6,000 | $ | 270 | 10.7 | % | |||
SVB Capital Partners II, LP (1) |
1,200 | 546 | 5.1 | ||||||
SVB Strategic Investors Fund, LP |
15,300 | 1,530 | 12.6 | ||||||
SVB Strategic Investors Fund II, LP |
15,000 | 4,125 | 8.6 | ||||||
SVB Strategic Investors Fund III, LP |
15,000 | 8,550 | 5.9 | ||||||
SVB Strategic Investors Fund IV, LP |
12,239 | 11,505 | 5.0 | ||||||
Partners for Growth, LP |
25,000 | 9,750 | 50.0 | ||||||
Partners for Growth II, LP |
15,000 | 4,950 | 24.2 | ||||||
Gold Hill Venture Lending 03, LP (2) |
20,000 | | 9.3 | ||||||
SVB India Capital Partners I, LP |
7,750 | 3,488 | 14.4 | ||||||
Other Fund Investments (3) |
466,674 | 334,069 | N/A | ||||||
Total |
$ | 599,163 | $ | 378,783 | |||||
(1) | Our ownership includes 1.3% direct ownership through SVB Capital Partners II, LLC and SVB Financial Group, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP. |
(2) | Our ownership includes 4.8% direct ownership and 4.5% indirect ownership interest through GHLLC. |
(3) | Represents commitments to 354 venture capital and private equity funds where our ownership interest is less than 5% of the voting interests of each such fund. Of the $334.1 million of unfunded commitments, approximately $290.6 million represents the remainder of the investment commitments made by SVB Financial on behalf of certain new managed funds of funds that we plan to form (New Fund Commitments). As of June 30, 2009, $48.5 million of the New Fund Commitments has already been funded and is included as a part of our investment securities portfolio in private equity investments (cost method accounting). The New Fund Commitments are intended to be transferred to, and become the financial obligations of, these new funds once they are formed with the binding commitments of outside investors. Upon formation of such funds and transfer of these investments to the new funds, these investments are expected to be accounted for on an investment company fair value basis and any underlying gains or losses would be recognized in earnings according to the ownership interests of all participants in the fund, including SVB Financial. |
13. Income Taxes
At June 30, 2009, the total amount of unrecognized tax benefits was $0.3 million, the recognition of which would reduce our income tax expense by $0.3 million. Total accrued interest and penalties at June 30, 2009 were $0.1 million. We expect that our unrecognized tax benefit will change in the next 12 months, however, we do not expect the change to have a material impact on our financial position or our results of operations.
We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as major tax filings. U.S. federal tax examinations through 1998 have been concluded. The U.S. federal tax return for 2005 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2004 and 2005, respectively, and subsequent years remain open to examination.
14. Fair Value of Financial Instruments
Our marketable investment securities, non-marketable investment securities using investment company fair value accounting and derivatives are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements.
26
The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2009, in accordance with SFAS No. 157, Fair Value Measurements (SFAS No. 157):
(Dollars in thousands) |
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Balance as of
June 30, 2009 |
||||||||
Assets |
||||||||||||
Marketable securities: |
||||||||||||
Available-for-sale securities: |
||||||||||||
U.S. Treasury securities |
$ | | $ | 25,977 | $ | | $ | 25,977 | ||||
U.S. agency debentures |
| 705,016 | | 705,016 | ||||||||
Residential mortgage-backed securities: |
||||||||||||
Agency-issued mortgage-backed securities |
| 424,388 | | 424,388 | ||||||||
Agency-issued collateralized mortgage obligations |
| 756,615 | | 756,615 | ||||||||
Non-agency mortgage-backed securities |
| 96,064 | | 96,064 | ||||||||
Commercial mortgage-backed securities |
| 47,838 | | 47,838 | ||||||||
Municipal bonds and notes |
| 102,965 | | 102,965 | ||||||||
Marketable equity securities |
275 | | | 275 | ||||||||
Venture capital fund investments |
1 | | | 1 | ||||||||
Total available-for-sale securities |
276 | 2,158,863 | | 2,159,139 | ||||||||
Marketable securities (investment company fair value accounting) |
547 | | | 547 | ||||||||
Total marketable securities |
823 | 2,158,863 | | 2,159,686 | ||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||
Private equity fund investments |
| | 225,892 | 225,892 | ||||||||
Other private equity investments |
| | 84,613 | 84,613 | ||||||||
Other investments |
| | 1,348 | 1,348 | ||||||||
Total non-marketable securities (investment company fair value accounting) |
| | 311,853 | 311,853 | ||||||||
Other assets: |
||||||||||||
Interest rate swaps |
| 49,739 | | 49,739 | ||||||||
Foreign exchange forward contracts |
| 22,122 | | 22,122 | ||||||||
Equity warrant assets |
| 6,691 | 41,013 | 47,704 | ||||||||
Total assets (1) |
$ | 823 | $ | 2,237,415 | $ | 352,866 | $ | 2,591,104 | ||||
Liabilities |
||||||||||||
Foreign exchange forward contracts |
$ | | $ | 22,854 | $ | | $ | 22,854 | ||||
Total liabilities |
$ | | $ | 22,854 | $ | | $ | 22,854 | ||||
(1) | Included in Level 1 and Level 3 assets are $0.4 million and $284.5 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests. |
27
The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2008, in accordance with SFAS No. 157:
(Dollars in thousands) |
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Balance as of
December 31, 2008 |
||||||||
Assets |
||||||||||||
Marketable securities: |
||||||||||||
Available-for-sale securities: |
||||||||||||
U.S. agency debentures |
$ | | $ | 113,603 | $ | | $ | 113,603 | ||||
Residential mortgage-backed securities: |
||||||||||||
Agency-issued mortgage-backed securities |
| 448,594 | | 448,594 | ||||||||
Agency-issued collateralized mortgage obligations |
| 483,275 | | 483,275 | ||||||||
Non-agency mortgage-backed securities |
| 115,330 | | 115,330 | ||||||||
Commercial mortgage-backed securities |
| 47,481 | | 47,481 | ||||||||
Municipal bonds and notes |
| 108,755 | | 108,755 | ||||||||
Marketable equity securities |
152 | | | 152 | ||||||||
Venture capital fund investments |
1 | | | 1 | ||||||||
Total available-for-sale securities |
153 | 1,317,038 | | 1,317,191 | ||||||||
Marketable securities (investment company fair value accounting) |
1,703 | | | 1,703 | ||||||||
Total marketable securities |
1,856 | 1,317,038 | | 1,318,894 | ||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||
Private equity fund investments |
| | 242,645 | 242,645 | ||||||||
Other private equity investments |
| | 82,444 | 82,444 | ||||||||
Other investments |
| | 1,547 | 1,547 | ||||||||
Total non-marketable securities (investment company fair value accounting) |
| | 326,636 | 326,636 | ||||||||
Other assets: |
||||||||||||
Interest rate swaps |
| 94,142 | | 94,142 | ||||||||
Foreign exchange forward contracts |
| 37,189 | | 37,189 | ||||||||
Equity warrant assets |
| 1,960 | 41,699 | 43,659 | ||||||||
Total assets (1) |
$ | 1,856 | $ | 1,450,329 | $ | 368,335 | $ | 1,820,520 | ||||
Liabilities |
||||||||||||
Foreign exchange forward contracts |
$ | | $ | 32,632 | $ | | $ | 32,632 | ||||
Total liabilities |
$ | | $ | 32,632 | $ | | $ | 32,632 | ||||
(1) | Included in Level 1 and Level 3 assets are $1.0 million and $297.4 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests. |
28
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2009, and 2008:
Total Realized and Unrealized
Gains (Losses) Included in Income |
||||||||||||||||||||||||||
(Dollars in thousands) |
Beginning
Balance |
Realized Gains
(Losses) Included in Income |
Unrealized Gains
(Losses) Included in Income |
Total Realized and
Unrealized Gains (Losses) Included in Income |
Purchases, Sales,
Other Settlements and Issuances, net |
Transfers In
and/or (Out) of Level 3 |
Ending
Balance |
|||||||||||||||||||
Three months ended June 30, 2009: |
||||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||||||||||||
Private equity fund investments |
$ | 218,366 | $ | 1,174 | $ | (6,469 | ) | $ | (5,295 | ) | $ | 12,821 | $ | | $ | 225,892 | ||||||||||
Other private equity investments |
82,473 | (907 | ) | (1,124 | ) | (2,031 | ) | 4,171 | | 84,613 | ||||||||||||||||
Other investments |
1,276 | | 249 | 249 | (177 | ) | | 1,348 | ||||||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
302,115 | 267 | (7,344 | ) | (7,077 | ) | 16,815 | | 311,853 | |||||||||||||||||
Other assets: |
||||||||||||||||||||||||||
Equity warrant assets (2) |
43,012 | (41 | ) | (2,774 | ) | (2,815 | ) | 928 | (112 | ) | 41,013 | |||||||||||||||
Total assets |
$ | 345,127 | $ | 226 | $ | (10,118 | ) | $ | (9,892 | ) | $ | 17,743 | $ | (112 | ) | $ | 352,866 | |||||||||
Three months ended June 30, 2008: |
||||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||||||||||||
Private equity fund investments |
$ | 211,361 | $ | 3,298 | $ | (5,015 | ) | $ | (1,717 | ) | $ | 11,319 | $ | | $ | 220,963 | ||||||||||
Other private equity investments |
52,287 | 4,124 | (1,283 | ) | 2,841 | 5,144 | | 60,272 | ||||||||||||||||||
Other investments |
2,651 | | 138 | 138 | (146 | ) | | 2,643 | ||||||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
266,299 | 7,422 | (6,160 | ) | 1,262 | 16,317 | | 283,878 | ||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||
Equity warrant assets (2) |
30,641 | 703 | 1,615 | 2,318 | 1,492 | 43 | 34,494 | |||||||||||||||||||
Total assets |
$ | 296,940 | $ | 8,125 | $ | (4,545 | ) | $ | 3,580 | $ | 17,809 | $ | 43 | $ | 318,372 | |||||||||||
Six months ended June 30, 2009: |
||||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||||||||||||
Private equity fund investments |
$ | 242,645 | $ | 2,057 | $ | (37,548 | ) | $ | (35,491 | ) | $ | 18,738 | $ | | $ | 225,892 | ||||||||||
Other private equity investments |
82,444 | (1,430 | ) | (6,133 | ) | (7,563 | ) | 9,732 | | 84,613 | ||||||||||||||||
Other investments |
1,547 | | 616 | 616 | (815 | ) | | 1,348 | ||||||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
326,636 | 627 | (43,065 | ) | (42,438 | ) | 27,655 | | 311,853 | |||||||||||||||||
Other assets: |
||||||||||||||||||||||||||
Equity warrant assets (2) |
41,699 | 169 | (3,175 | ) | (3,006 | ) | 2,531 | (211 | ) | 41,013 | ||||||||||||||||
Total assets |
$ | 368,335 | $ | 796 | $ | (46,240 | ) | $ | (45,444 | ) | $ | 30,186 | $ | (211 | ) | $ | 352,866 | |||||||||
Six months ended June 30, 2008: |
||||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||||||||||||
Private equity fund investments |
$ | 194,862 | $ | 5,183 | $ | (4,117 | ) | $ | 1,066 | $ | 25,035 | $ | | $ | 220,963 | |||||||||||
Other private equity investments |
44,872 | 4,672 | (1,766 | ) | 2,906 | 12,494 | | 60,272 | ||||||||||||||||||
Other investments |
3,098 | | (163 | ) | (163 | ) | (292 | ) | | 2,643 | ||||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
242,832 | 9,855 | (6,046 | ) | 3,809 | 37,237 | | 283,878 | ||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||
Equity warrant assets (2) |
26,911 | 5,363 | 3,417 | 8,780 | (1,238 | ) | 41 | 34,494 | ||||||||||||||||||
Total assets |
$ | 269,743 | $ | 15,218 | $ | (2,629 | ) | $ | 12,589 | $ | 35,999 | $ | 41 | $ | 318,372 | |||||||||||
(1) | Realized and unrealized gains (losses) are recorded on the line items (losses) gains on investment securities, net and other noninterest income, components of noninterest income. |
(2) | Realized and unrealized gains (losses) are recorded on the line item (losses) gains on derivative instruments, net a component of noninterest income. |
29
The following table presents the amount of unrealized gains (losses) included in earnings for the three and six months ended June 30, 2009 attributable to Level 3 assets still held at June 30, 2009:
(Dollars in thousands) |
Three months ended
June 30, 2009 |
Six months ended
June 30, 2009 |
||||||
Non-marketable securities (investment company fair value accounting): |
||||||||
Private equity fund investments |
$ | (6,469 | ) | $ | (37,548 | ) | ||
Other private equity investments |
(1,124 | ) | (6,633 | ) | ||||
Other investments |
249 | 616 | ||||||
Total non-marketable securities (investment company fair value accounting) |
(7,344 | ) | (43,565 | ) | ||||
Other assets: |
||||||||
Equity warrant assets |
(1,217 | ) | (615 | ) | ||||
Total unrealized losses |
$ | (8,561 | ) | $ | (44,180 | ) | ||
SFAS No. 107, Disclosures about Fair Value of Financial Instruments (SFAS No. 107), requires that we disclose estimated fair values for our financial instruments. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of SFAS No. 107.
Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for many of our financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are managements estimates of the values, and they are calculated based on indicator prices corroborated by observable market quotes or pricing models, the economic and competitive environment, the characteristics of the financial instruments, expected losses, and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment, and do not include tax ramifications; therefore, the results cannot be determined with precision or substantiated by comparison to independent markets, and they may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.
The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above in our SFAS No. 157 disclosures.
Short-Term Financial Assets
Short-term financial assets include cash on hand, cash balances due from banks, interest-earning deposits, securities purchased under agreement to resell and other short-term investment securities. The carrying amount is a reasonable estimate of fair value because of the insignificant risk of changes in fair value due to changes in market interest rates, and purchased in conjunction with our cash management activities.
Investment SecuritiesNon-Marketable (Cost and Equity Method Accounting)
Non-marketable investment securities (cost and equity method accounting) includes other investments (equity method accounting), low income housing tax credit funds (equity method accounting), private equity fund investments (cost method accounting), and other private equity investments (cost method accounting). The fair value of other investments (equity method accounting), private equity fund investments (cost method accounting), and other private equity investments (cost method accounting) is based on financial information obtained as the investor or obtained from the fund investments' or debt fund investments' respective general partner. For private company investments, fair value is based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. For our fund investments and debt fund investments, we utilize the most recent available financial information from the investee general partner, for example March 31, for our June 30th interim consolidated financial statements, adjusted for any contributions paid or distributions received from the investment during the second quarter. The fair value of our low income housing tax credit funds (equity method accounting) is based on carrying value.
Loans
The fair value of fixed and variable rate loans is estimated by discounting contractual cash flows using discount rates that reflect our current pricing for loans and the forward yield curve.
30
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking accounts and money market accounts is equal to the amount payable on demand at the measurement date. The fair value of time deposits is estimated by discounting the balances using our cost of borrowings and the forward yield curve over their remaining contractual term.
Short-Term Borrowings
Short-term borrowings at June 30, 2009 and December 31, 2008 included cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated note. The carrying amount is a reasonable estimate of fair value.
Long-Term Debt
Long-term debt includes our contingently convertible debt, junior subordinated debentures, senior and subordinated notes, and other long-term debt (see Note 8- Short-Term Borrowings and Long-Term Debt). The fair value of long-term debt is based on quoted market prices, when available, or is estimated based on calculations utilizing third-party pricing services and current market spread, price indications from reputable dealers or observable market prices of the underlying instrument(s), whichever is deemed more reliable.
Off-Balance Sheet Financial Instruments
The fair value of unfunded commitments to extend credit is estimated based on the average amount we would receive or pay to execute a new agreement with identical terms, considering current interest rates and taking into account the remaining terms of the agreement and counterparties credit standing.
Letters of credit are carried at their fair value, which is equivalent to the residual premium or fee at June 30, 2009 and December 31, 2008. Commitments to extend credit and letters of credit typically result in loans with a market interest rate if funded.
Limitations
The information presented herein is based on pertinent information available to us as of June 30, 2009 and December 31, 2008. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the most recent year end, and the estimated fair values of these financial instruments may have changed significantly since that point in time.
The following table is a summary of the estimated fair values of our financial instruments that are not carried at fair value at June 30, 2009 and December 31, 2008.
June 30, 2009 | December 31, 2008 | |||||||||||
(Dollars in thousands) |
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
||||||||
Financial assets: |
||||||||||||
Investment securities-non-marketable (cost and equity method accounting) |
$ | 166,841 | $ | 158,611 | $ | 140,570 | $ | 143,724 | ||||
Net loans |
4,733,780 | 4,829,834 | 5,398,857 | 5,518,431 | ||||||||
Financial liabilities: |
||||||||||||
Other short-term borrowings |
31,340 | 31,340 | 62,120 | 62,120 | ||||||||
Deposits |
8,994,583 | 8,993,809 | 7,473,472 | 7,471,614 | ||||||||
5.70% senior notes (1) (2) |
270,583 | 257,200 | 279,370 | 262,043 | ||||||||
6.05% subordinated notes (1) (2) |
278,550 | 225,471 | 313,953 | 269,429 | ||||||||
3.875% convertible senior notes |
245,876 | 227,061 | 244,783 | 199,795 | ||||||||
7.0% junior subordinated debentures (2) |
55,950 | 31,979 | 55,914 | 32,747 | ||||||||
Other long-term debt |
58,682 | 58,435 | 101,403 | 101,695 | ||||||||
Off-balance sheet financial assets: |
||||||||||||
Commitments to extend credit |
| 14,729 | | 17,920 |
(1) | At June 30, 2009, included in the carrying value and estimated fair value of our 5.70% senior notes and 6.05% subordinated notes, are $20.7 million and $29.0 million, respectively related to the fair value of the interest rate swaps associated with the notes. |
(2) | At December 31, 2008, included in the carrying value and estimated fair value of our 5.70% senior notes, 6.05% subordinated notes and 7.0% junior subordinated debentures, are $29.5 million, $64.4 million and $0.2 million, respectively related to the fair value of the interest rate swaps associated with the notes. The interest rate swap on our 7.0% junior subordinated debentures was terminated and no longer designated as a hedging instrument in the first quarter of 2009. |
15. Legal Matters
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Based upon information available to us, our review of such claims to date and consultation with our outside legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. Where appropriate, as we determine, we establish reserves in accordance with SFAS No. 5, Accounting For Contingencies . The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operation.
31
16. Subsequent Events
On July 15, 2009, an independent asset management firm announced that it had closed its transaction with HRJ Capital, LLC (HRJ) to assume the management of HRJs private equity and real estate funds of funds. The transaction included the restructuring of the debt obligations owed to us by HRJ and its affiliates. Subject to final review of the accounting impact of the transaction, we do not expect the transaction will have any material impact on our net income and provision for loan losses for the third quarter of 2009.
At the end of the second quarter of 2009, we entered into an agreement for a transaction, which is expected to result in a recovery of approximately $11.5 million, on a pre-tax basis, from a single loan previously charged-off in the first quarter of 2009. The final transaction and our receipt of the transaction proceeds are subject to the satisfaction of various closing conditions. We currently expect that the transaction will close during the third quarter of 2009.
We have evaluated all subsequent events through August 7, 2009, the date the accompanying interim consolidated financial statements were issued, and determined there are no events other than those discussed above that require disclosure.
32
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements; Reclassifications
This Quarterly Report on Form 10-Q, including in particular Managements Discussion and Analysis of Financial Condition and Results of Operations under Part 1, Item 2 of this report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but are not limited to, the following:
|
Projections of our net interest income, noninterest income, earnings per share, noninterest expenses, including professional service, compliance, compensation and other costs, cash flows, balance sheet positions, capital expenditures, and capitalization or other financial items |
|
Descriptions of strategic initiatives, plans or objectives of our management for future operations, including pending acquisitions |
|
Forecasts of venture capital/private equity funding and investment levels |
|
Forecasts of future interest rates, economic performance, and income on investments |
|
Forecasts of expected levels of provisions for loan losses, loan growth and client funds |
|
Descriptions of assumptions underlying or relating to any of the foregoing |
In this Quarterly Report on Form 10-Q, we make forward-looking statements, including, but not limited to, those discussing our managements expectations about:
|
The likelihood that the market value of our impaired investments will recover |
|
The extent to which counterparties to forward and option contracts will perform their obligations under such contracts |
|
The formation of new managed funds and the transfer of investments to these new funds |
|
The sufficiency of our capital, including in the event of credit losses |
|
The likelihood that funds generated through retained earnings will continue to be a significant source of capital and liquidity |
|
The expansion of operations in China, India, Israel, the United Kingdom and elsewhere |
|
Economic conditions and associated impact on us |
|
The extent to which our products and services will meet changing client needs |
|
The payment of cash dividends on, or our repurchase of, our common stock |
|
The adequacy of reserves and appropriateness of methodology for calculating our reserves |
|
The sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to earnings from a change in interest rates; overall management of interest rate risk |
|
The realization, timing, valuation and performance of equity or other investments |
|
Our liquidity position |
|
The level of client investment fees and associated margins |
|
The level of loan and deposit balances |
|
The credit quality of our loan portfolio, including levels and trends of nonperforming loans |
|
The activities for which capital may be used or required |
|
The financial impact of continued growth of our funds management business |
|
The expansion and growth of our noninterest income sources |
|
The profitability of our products and services |
|
Our venture capital and private equity funding and investment levels |
|
Our strategic initiatives |
|
The effect of application of certain accounting pronouncements |
|
The effect of lawsuits and claims |
|
The changes in, or adequacy of, our unrecognized tax benefit and any associated impact |
|
The cash requirements of unfunded commitments to certain investments |
|
The financial impact of transaction involving HRJ Capital |
|
The timing and closing of an expected credit recovery transaction |
|
The investment of excess cash |
|
The settlement of convertible debt instruments |
You can identify these and other forward-looking statements by the use of words such as becoming, may, will, should, predicts, potential, continue, anticipates, believes, estimates, seeks, expects, plans, intends, the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our managements forward-looking statements.
33
For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see Risk Factors under Part II, Item 1A of this report. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this report. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and accompanying notes as presented in Part I, Item 1 of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), as filed with the Securities and Exchange Commission (SEC).
Certain reclassifications have been made to prior years results to conform to the current periods presentations. Such reclassifications had no effect on our results of operations or stockholders equity. In addition, certain amounts in prior years results have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts, as well as the adoption of Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1). Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for the three and six months ended June 30, 2008 have been revised.
Managements Overview of Second Quarter 2009 Performance
Our clients continued to be affected by the economic downturn in the second quarter of 2009. During the second quarter, we were generally impacted by continued declines in venture capital and private equity activity, continued pressure on valuations in our venture and private equity-related investments, higher-than-normal credit losses, lower loan demand, and lower income from many of our fee-based products.
We recorded net income available to common stockholders for the three months ended June 30, 2009 of $7.8 million, or $0.24 per diluted common share. We continued to see strong deposit growth during the first half of the year as a result of our deposit initiatives, as well as from the desire of some clients seeking the security provided by the Federal Deposit Insurance Corporation (FDIC). Although the growth in deposits significantly increased our cash levels, we have deposited a majority of this excess cash with the Federal Reserve, earning interest at the Federal Funds target rate. In addition, we have increased our fixed income investment securities portfolio by $583.0 million to $2.2 billion at June 30, 2009, compared to $1.6 billion at March 31, 2009. While liquidity remains a priority, we expect to invest a more significant portion of the excess cash from deposits into fixed income investment securities through the remainder of 2009 at higher yields.
Highlights of our second quarter 2009 financial results (compared to the second quarter of 2008, where applicable) included the following:
|
Provision for loan losses of $21.4 million, which included $21.9 million related to gross loan charge-offs from our life sciences, software and private client services portfolios. |
|
A special assessment fee of $5.0 million, mandated for all banks by the FDIC. |
|
Growth of $3.8 billion in average deposit balances to $8.4 billion, which decreased our average loan-to-deposit ratio to 56.7 percent for the second quarter of 2009. |
|
Growth of $0.5 billion in average loans to $4.8 billion, primarily from loans to software, life sciences and hardware clients. |
|
Growth of $0.5 billion in average investment securities to $1.8 billion, primarily due to purchases of U.S. agency securities and agency-issued collateralized mortgage obligations, which were purchased with excess cash as a result of our continued growth in deposits. |
|
A decrease in our net interest margin from 5.62 percent to 3.71 percent, primarily due to the current low interest rate environment. |
The discussions below under our results of operations provide more information on our second quarter 2009 performance.
34
The key highlights of our performance for the three and six months ended June 30, 2009 and 2008, respectively, were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands, except per share data and ratios) |
2009 | 2008 * | Change | 2009 | 2008 * | Change | ||||||||||||||||
Average loans, net of unearned income |
$ | 4,779,966 | $ | 4,319,897 | 10.6 | % | $ | 4,947,180 | $ | 4,216,381 | 17.3 | % | ||||||||||
Average noninterest-bearing deposits |
5,132,849 | 2,832,956 | 81.2 | 4,886,071 | 2,866,278 | 70.5 | ||||||||||||||||
Average interest-bearing deposits |
3,299,748 | 1,815,867 | 81.7 | 3,295,475 | 1,675,641 | 96.7 | ||||||||||||||||
Average total deposits |
8,432,597 | 4,648,823 | 81.4 | 8,181,546 | 4,541,919 | 80.1 | ||||||||||||||||
Diluted earnings (loss) per share (1) |
$ | 0.24 | $ | 0.61 | (60.7 | )% | $ | (0.12 | ) | $ | 1.40 | (108.6 | )% | |||||||||
Net income attributable to SVBFG (1) |
11,338 | 21,014 | (46.0 | ) | 3,103 | 48,254 | (93.6 | ) | ||||||||||||||
Net income (loss) available to common stockholders (1) |
7,793 | 21,014 | (62.9 | ) | (3,978 | ) | 48,254 | (108.2 | ) | |||||||||||||
Net interest income (1) |
91,681 | 86,796 | 5.6 | 183,192 | 177,574 | 3.2 | ||||||||||||||||
Net interest margin (1) |
3.71 | % | 5.62 | % | (191 | )bps | 3.83 | % | 5.94 | % | (211 | )bps | ||||||||||
Average SVB prime lending rate |
4.00 | 5.08 | (108 | )bps | 4.00 | 5.66 | (166 | )bps | ||||||||||||||
Allowance for loan losses as a percentage of total gross loans |
2.26 | 1.13 | 113 | bps | 2.26 | 1.13 | 113 | bps | ||||||||||||||
Provision for loan losses |
$ | 21,393 | $ | 8,351 | 156.2 | % | $ | 64,859 | $ | 16,074 | NM | % | ||||||||||
Gross loan charge-offs as a percentage of average total gross loans (annualized) |
1.82 | % | 0.84 | % | 98 | bps | 2.58 | % | 0.73 | % | 185 | bps | ||||||||||
Net loan charge-offs as a percentage of average total gross loans (annualized) |
1.74 | 0.47 | 127 | bps | 2.50 | 0.50 | 200 | bps | ||||||||||||||
Noninterest income (2) |
$ | 28,275 | $ | 44,515 | (36.5 | )% | $ | 22,694 | $ | 86,267 | (73.7 | )% | ||||||||||
Noninterest expense (3) |
89,012 | 87,189 | 2.1 | 176,152 | 170,626 | 3.2 | ||||||||||||||||
Return on average common SVBFG stockholders equity (annualized) (1)(4) |
3.95 | % | 12.41 | % | (68.2 | ) | (1.02 | )% | 14.15 | % | (107.2 | ) | ||||||||||
Return on average assets (annualized) (1)(5) |
0.42 | 1.18 | (64.4 | ) | 0.06 | 1.40 | (95.7 | ) | ||||||||||||||
Book value per common share (6) |
24.04 | 21.44 | 12.1 | 24.04 | 21.44 | 12.1 | ||||||||||||||||
Operating efficiency ratio (1)(7) |
73.86 | % | 66.11 | % | 11.7 | 85.09 | % | 64.40 | % | 32.1 | ||||||||||||
Period end full-time equivalent employees |
1,260 | 1,209 | 4.2 | 1,260 | 1,209 | 4.2 | ||||||||||||||||
Non-GAAP measures: |
||||||||||||||||||||||
Non-GAAP operating efficiency ratio (1)(8) |
68.05 | % | 64.70 | % | 5.2 | % | 69.71 | % | 62.31 | % | 11.9 | % | ||||||||||
Non-GAAP noninterest income, net of noncontrolling interest (9) |
$ | 34,372 | $ | 43,698 | (21.3 | ) | $ | 59,383 | $ | 87,166 | (31.9 | ) | ||||||||||
Non-GAAP noninterest expense, net of noncontrolling interest (9) |
86,164 | 84,732 | 1.7 | 169,917 | 165,410 | 2.7 | ||||||||||||||||
Tangible common equity to tangible assets (10) |
6.94 | 9.39 | (26.1 | ) | 6.94 | 9.39 | (26.1 | ) | ||||||||||||||
Tangible common equity to risk-weighted assets |
10.54 | 9.72 | 8.4 | 10.54 | 9.72 | 8.4 |
NM- Not meaningful
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for the three and six months ended June 30, 2008 have been revised. |
(1) | Balances and ratios for all periods presented reflect our adoption of FSP APB No. 14-1. Refer to Critical Accounting Policies and Estimates Impact of Adopting FSP APB No. 14-1 and Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for the three and six months ended June 30, 2008 have been retrospectively adjusted. |
(2) | Noninterest income included net losses of $6.1 million and $36.7 million attributable to noncontrolling interests for the three and six months ended June 30, 2009, respectively, compared to net gains of $0.8 million and net losses of $0.9 million for the comparable 2008 periods, respectively. See Results of Operations Noninterest Income for a description of noninterest income attributable to noncontrolling interests. |
(3) | Noninterest expense included $2.8 million and $6.2 million attributable to noncontrolling interests for the three and six months ended June 30, 2009, respectively, compared to $2.5 million and $5.2 million for the comparable 2008 periods. See Results of Operations Noninterest Expense for a description of noninterest expense attributable to noncontrolling interests. |
(4) | Ratio represents annualized consolidated net income (loss) available to common stockholders divided by quarterly average SVB Financial Group (SVBFG) stockholders equity (excluding preferred equity) and year-to-date average assets. |
(5) | Ratio represents annualized consolidated net income attributable to SVBFG divided by quarterly average assets and year-to-date average assets. |
(6) | Book value per common share is calculated by dividing total SVBFG stockholders equity (excluding preferred equity) by total outstanding common shares. |
(7) | The operating efficiency ratio is calculated by dividing noninterest expense by total taxable-equivalent income. |
(8) | See Results of Operations Noninterest Expense for a reconciliation of the non-GAAP operating efficiency ratio. |
(9) | See Results of Operations Noninterest Income for a description of noninterest income and noninterest expense that is attributable to noncontrolling interests. |
(10) | See Capital Resources Capital Ratios for a reconciliation of non-GAAP tangible common equity and tangible assets. |
35
Critical Accounting Policies and Estimates
The accompanying managements discussion and analysis of results of operations and financial condition are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
There have been no significant changes during the six months ended June 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of our 2008 Form 10-K.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Our marketable investment securities, certain non-marketable investment securities using investment company fair value accounting and derivatives are financial instruments recorded at fair value on a recurring basis. For a detailed description of our method, critical estimates and approach for fair value measurements of assets and liabilities, refer to our Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of our 2008 Form 10-K.
At June 30, 2009, approximately 22.6 percent of our total assets, or $2.6 billion, consisted of financial assets recorded at fair value on a recurring basis. Of these assets, 86.4 percent used valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value, and 13.6 percent of these financial assets were measured using model-based techniques, or Level 3 measurements. Almost all of our financial assets valued using Level 3 measurements at June 30, 2009 represented non-marketable securities. At June 30, 2009, 0.2 percent of total liabilities, or $22.9 million, consisted of financial liabilities recorded at fair value on a recurring basis, which were valued using market-observable inputs. There were no material transfers in or out of Level 3 during the six months ended June 30, 2009. Our valuation processes include a number of key controls that are designed to ensure that fair value is calculated appropriately. Such controls include a model validation policy requiring that models that provide values used in financial statements be validated by qualified personnel and escalation procedures to ensure that valuations using unverifiable inputs are identified and monitored on a regular basis by senior management.
As of June 30, 2009, our available-for-sale investment portfolio, consisting primarily of U.S. agency debentures, investment grade mortgage securities and municipal bonds and notes, represented $2.2 billion, or 83.3 percent of our portfolio of assets measured at fair value on a recurring basis. These instruments were classified as Level 2 because their valuations were based on indicator prices corroborated by observable market quotes or pricing models with all significant inputs derived from or corroborated by observable market data. Since our available-for-sale fixed-income investment securities portfolio consisted primarily of fixed rate securities, the fair value of the portfolio is sensitive to changes in levels of market interest rates and market perceptions of credit quality of the underlying securities. Market valuations and impairment analyses on assets in the fixed-income investment portfolio are reviewed and monitored on an ongoing basis.
To the extent available-for-sale investment securities are used to secure borrowings, changes in the fair value of those securities could have an impact on the total amount of secured financing available. We pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco at June 30, 2009 totaled $588.1 million, of which $537.1 million was available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank in accordance with our risk management practices at June 30, 2009 totaled $84.4 million, all of which was unused. We have repurchase agreements in place with multiple securities dealers, which allow us to access short-term borrowings by using fixed income securities as collateral. At June 30, 2009, we had not borrowed against our repurchase lines.
Financial assets valued using Level 3 measurements consist primarily of our investments in venture capital and private equity funds, direct equity investments in privately held companies and certain investments made by our consolidated sponsored debt fund. These funds are investment companies under the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and accordingly, these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated statements of income. Assets valued using Level 3 measurements also include equity warrant assets in shares of private company capital stock.
During the three and six months ended June 30, 2009, the Level 3 assets that are measured at fair value on a recurring basis experienced net unrealized fair value decreases totaling $10.1 million and $46.2 million, respectively, primarily due to lower
36
valuations in underlying fund investments in our venture capital and private equity funds. Realized gains related to the Level 3 assets for the three and six months ended June 30, 2009 of $0.2 million and $0.8 million, respectively, related primarily to gains from distributions from underlying fund investments in our private equity funds.
The valuation of nonmarketable securities and equity warrant assets in shares of private company capital stock is subject to management judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for initial public offerings, levels of merger and acquisition activity, legal and contractual restrictions on our ability to sell, and the perceived and actual performance of portfolio companies. All of these factors are difficult to predict.
Recent Accounting Pronouncements
Please refer to Note 1-Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Impact of Adopting FSP APB No. 14-1
Effective January 1, 2009, we adopted the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1). Our adoption on January 1, 2009 required historical financial statements for 2007 and 2008 to be adjusted to conform to the FSPs new accounting treatment for both our $150 million zero-coupon convertible subordinated notes (2003 Convertible Notes), which matured on June 15, 2008, and our $250 million 3.875% convertible senior notes (2008 Convertible Notes), due April 15, 2011. For further details, please refer to Note 1-Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Correction of an Immaterial Error
During the second quarter of 2009, we determined that we had incorrectly recognized certain gains and losses on foreign exchange contracts in prior periods. The cumulative pre-tax effect of the error was $6.2 million, or $3.8 million after-tax and is considered to be immaterial to the prior periods. However, since the cumulative impact of correcting this error would be material to the results of the quarter ended June 30, 2009, we applied the guidance of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108). This guidance requires that that the prior financial statements be corrected, even though such revisions were, and continue to be, immaterial to the prior period financial statements. As such, the affected prior period results have been revised as follows: For the three months ended March 31, 2009, net loss increased by $1.2 million, or $0.04 per diluted common share, for the year ended December 31, 2008, net income was reduced by $2.3 million, or $0.07 per diluted common share, and for the year ended December 31, 2007, net income was reduced by $0.2 million, or $0.01 per diluted common share. For further details, please refer to Note 1-Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Net interest income is defined as the difference between interest earned on loans, investment securities, federal funds sold, securities purchased under agreements to resell and other short-term investment securities, and interest paid on funding sources including deposits and borrowings. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable-equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 35.0 percent.
Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended June 30, 2009 and 2008
Net interest income increased by $4.8 million to $92.2 million for the three months ended June 30, 2009, compared to $87.4 million for the comparable 2008 period. The increase in net interest income was primarily the result of an increase in average balances of our interest-earning assets and a decrease in the cost of our total funding sources, partially offset by a decrease in yields earned on interest-earning assets.
37
The main factors affecting interest income and interest expense for the three months ended June 30, 2009, compared to the comparable 2008 period are discussed below:
|
Interest income for the three months ended June 30, 2009 increased by $0.7 million primarily due to: |
¡ |
A $2.1 million increase in interest income on interest-earning investment securities, primarily related to the growth in average balances of $496.2 million due to purchases of U.S. agency securities and agency-issued collateralized mortgage obligations. The investments were made as part of our overall investment strategy as a result of the growth in our deposits. |
The increase was partially offset by the following decreases:
¡ |
A decrease of $1.2 million in interest income on short-term investment securities, primarily due to decreases in the Federal Funds rates in the latter half of 2008, partially offset by an increase in average balances as a result of the growth in our deposits. |
¡ |
A $0.3 million decrease in interest income on loans driven principally by an 80 basis point decrease in loan yields due primarily to decreases totaling 100 basis points in our prime-lending rate during 2008, in response to certain Federal Fund rate decreases. Our average prime-lending rate was 4.00 percent for the three months ended June 30, 2009, compared to 5.08 percent for the comparable 2008 period. The impact of lower loan yields was partially offset by an increase of $460.1 million in average loan balances for the three months ended June 30, 2009, compared to the comparable 2008 period. This growth was driven primarily by loan growth from loans to software, life sciences and hardware clients. |
|
Interest expense for the three months ended June 30, 2009 decreased by $4.2 million primarily due to: |
¡ |
A decrease in interest expense of $3.3 million from long-term debt, due to lower LIBOR rates associated with interest rate swap agreements on our senior and subordinated notes, as well as a $151.0 million decrease in average balances of long-term debt primarily due to the maturity of our 2003 Convertible Notes in June 2008. |
¡ |
A decrease in interest expense from short-term borrowings of $1.1 million, primarily due to declining short-term market interest rates, as well as a decrease in average balances of short-term borrowings. Average short-term borrowings decreased by $160.2 million to $45.8 million for the three months ended June 30, 2009, compared to $206.0 million for the comparable 2008 period, due to growth in deposit balances. |
Six months ended June 30, 2009 and 2008
Net interest income increased by $5.6 million to $184.3 million for the six months ended June 30, 2009, compared to $178.7 million for the comparable 2008 period. The increase in net interest income was primarily the result of an increase in average balances of our interest-earning assets and a decrease in the cost of our total funding sources, partially offset by a decrease in yields earned on interest-earning assets.
The main factors affecting interest income and interest expense for the six months ended June 30, 2009, compared to the comparable 2008 period are discussed below:
|
Interest income for the six months ended June 30, 2009 decreased by $1.3 million primarily due to: |
¡ |
A $1.8 million decrease in interest income on loans driven principally by a 128 basis point decrease in loan yields due primarily to decreases totaling 325 basis points in our prime-lending rate during 2008, in response to certain Federal Fund rate decreases. Our average prime-lending rate was 4.00 percent for the six months ended June 30, 2009, compared to 5.66 percent for the comparable 2008 period. The impact of lower loan yields was partially offset by an increase of $730.8 million in average loan balances for the six months ended June 30, 2009, compared to the comparable 2008 period. This growth was driven primarily by loan growth from all client industry segments, with particularly strong growth in loans to software clients and hardware clients. |
¡ |
A $2.9 million decrease in interest income on short-term investments primarily due to the decreases in the Federal Funds rates in the latter half of 2008, partially offset by an increase in average balances as a result of the growth in our deposits. |
38
These decreases were partially offset by an increase of $3.4 million in interest income on interest-earning investment securities, primarily due to purchases of U.S. agency securities and agency-issued collateralized mortgage obligations.
|
Interest expense for the six months ended June 30, 2009 decreased by $7.0 million primarily due to: |
¡ |
A decrease in interest expense of $5.9 million from long-term debt, primarily due to lower LIBOR rates associated with interest rate swap agreements on our senior and subordinated notes. |
¡ |
A decrease in interest expense from short-term borrowings of $2.9 million, primarily due to declining short-term market interest rates, as well as a decrease in average balances of short-term borrowings. Average short-term borrowings decreased by $174.1 million to $46.4 million for the six months ended June 30, 2009, compared to $220.5 million for the comparable 2008 period due to growth in deposit balances. |
These decreases were partially offset by an increase in interest expense of $1.8 million from interest-bearing deposits, primarily due to a $1.6 billion increase in average interest-bearing deposits. This increase was driven by growth from all our interest-bearing deposit products, with particularly strong growth from our sweep deposit product after discontinuation of our off-balance sheet sweep product. This increase was partially offset by a decrease in deposit interest rates.
Analysis of Interest Changes Due to Volume and Rate (Fully Taxable-Equivalent Basis)
Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as volume change. Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as rate change. Changes in our prime-lending rate also impact the yields on our loans, and, to a certain extent, our interest-bearing deposits. The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the periods indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.
2009 Compared to 2008 | 2009 Compared to 2008 | |||||||||||||||||||||||
Three months ended June 30,
Increase (decrease) due to change in |
Six months ended June 30,
Increase (decrease) due to change in |
|||||||||||||||||||||||
(Dollars in thousands) |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
$ | 4,460 | $ | (5,659 | ) | $ | (1,199 | ) | $ | 9,216 | $ | (12,156 | ) | $ | (2,940 | ) | ||||||||
Investment securities (Taxable) |
5,176 | (2,968 | ) | 2,208 | 7,254 | (3,965 | ) | 3,289 | ||||||||||||||||
Investment securities (Non-Taxable) |
| (76 | ) | (76 | ) | 260 | (145 | ) | 115 | |||||||||||||||
Loans, net of unearned income |
8,674 | (8,941 | ) | (267 | ) | 27,410 | (29,185 | ) | (1,775 | ) | ||||||||||||||
Increase (decrease) in interest income, net |
18,310 | (17,644 | ) | 666 | 44,140 | (45,451 | ) | (1,311 | ) | |||||||||||||||
Interest expense: |
||||||||||||||||||||||||
NOW deposits |
(13 | ) | (21 | ) | (34 | ) | 5 | (27 | ) | (22 | ) | |||||||||||||
Regular money market deposits |
1 | (359 | ) | (358 | ) | 124 | (601 | ) | (477 | ) | ||||||||||||||
Bonus money market deposits |
22 | (1,189 | ) | (1,167 | ) | 359 | (3,023 | ) | (2,664 | ) | ||||||||||||||
Foreign money market deposits |
78 | | 78 | 252 | | 252 | ||||||||||||||||||
Time deposits |
(43 | ) | (256 | ) | (299 | ) | 31 | (366 | ) | (335 | ) | |||||||||||||
Sweep deposits |
2,783 | (770 | ) | 2,013 | 6,248 | (1,191 | ) | 5,057 | ||||||||||||||||
Short-term borrowings |
(497 | ) | (587 | ) | (1,084 | ) | (1,317 | ) | (1,557 | ) | (2,874 | ) | ||||||||||||
Zero-coupon convertible subordinated notes |
(876 | ) | | (876 | ) | (2,418 | ) | | (2,418 | ) | ||||||||||||||
3.875% convertible senior notes |
285 | 72 | 357 | 3,815 | 47 | 3,862 | ||||||||||||||||||
Junior subordinated debentures |
31 | 322 | 353 | 72 | 342 | 414 | ||||||||||||||||||
Senior and subordinated notes |
279 | (2,578 | ) | (2,299 | ) | 699 | (6,445 | ) | (5,746 | ) | ||||||||||||||
Other long-term debt |
(732 | ) | (144 | ) | (876 | ) | (851 | ) | (1,167 | ) | (2,018 | ) | ||||||||||||
Increase (decrease) in interest expense, net |
1,318 | (5,510 | ) | (4,192 | ) | 7,019 | (13,988 | ) | (6,969 | ) | ||||||||||||||
Increase (decrease) in net interest income |
$ | 16,992 | $ | (12,134 | ) | $ | 4,858 | $ | 37,121 | $ | (31,463 | ) | $ | 5,658 | ||||||||||
Net Interest Margin (Fully Taxable-Equivalent Basis)
Our net interest margin was 3.71 percent and 3.83 percent for the three and six months ended June 30, 2009, compared to 5.62 percent and 5.94 percent for the comparable 2008 periods. The decreases in net interest margin were primarily due to decreases in yields on our loan portfolio resulting from reductions in our prime-lending rate, which we lowered in response to certain Federal Reserve rate cuts in 2008. The decreases in net interest margin were also attributable to an increase in cash as a result of the growth in noninterest-bearing and interest-bearing deposits, which were primarily deposited in overnight funds with the Federal Reserve. These reductions in our net interest margin were partially offset by a decrease in interest expense from borrowings due to declining market rates.
39
Average Balances, Yields and Rates Paid (Fully Taxable Equivalent Basis)
The average yield earned on interest-earning assets is the amount of annualized fully taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is the amount of annualized interest expense expressed as a percentage of average funding sources. The following tables set forth average assets, liabilities, noncontrolling interests and SVBFG stockholders equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three and six months ended June 30, 2009 and 2008, respectively.
Average Balances, Rates and Yields for the Three Months Ended June 30, 2009 and 2008
Three months ended June 30, | ||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||
(Dollars in thousands) |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1) |
$ | 3,369,317 | $ | 2,485 | 0.30 | % | $ | 597,673 | $ | 3,684 | 2.48 | % | ||||||||||
Investment securities: (2) |
||||||||||||||||||||||
Taxable |
1,729,648 | 16,794 | 3.89 | 1,233,490 | 14,586 | 4.76 | ||||||||||||||||
Non-taxable (3) |
103,017 | 1,583 | 6.16 | 102,989 | 1,659 | 6.48 | ||||||||||||||||
Total loans, net of unearned income (4) |
4,779,966 | 84,248 | 7.07 | 4,319,897 | 84,515 | 7.87 | ||||||||||||||||
Total interest-earning assets |
9,981,948 | 105,110 | 4.23 | 6,254,049 | 104,444 | 6.72 | ||||||||||||||||
Cash and due from banks |
198,361 | 249,074 | ||||||||||||||||||||
Allowance for loan losses |
(112,647 | ) | (52,776 | ) | ||||||||||||||||||
Goodwill |
| 4,092 | ||||||||||||||||||||
Other assets (5) |
860,304 | 703,591 | ||||||||||||||||||||
Total assets (6) |
$ | 10,927,966 | $ | 7,158,030 | ||||||||||||||||||
Funding sources: |
||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||
NOW deposits |
$ | 40,775 | $ | 37 | 0.36 | % | $ | 51,992 | $ | 71 | 0.55 | % | ||||||||||
Regular money market deposits |
152,894 | 175 | 0.46 | 152,707 | 533 | 1.40 | ||||||||||||||||
Bonus money market deposits |
908,884 | 1,300 | 0.57 | 900,767 | 2,467 | 1.10 | ||||||||||||||||
Foreign money market deposits |
49,181 | 78 | 0.64 | | | | ||||||||||||||||
Time deposits |
368,856 | 621 | 0.68 | 387,981 | 920 | 0.95 | ||||||||||||||||
Sweep deposits |
1,779,158 | 3,394 | 0.77 | 322,420 | 1,381 | 1.72 | ||||||||||||||||
Total interest-bearing deposits |
3,299,748 | 5,605 | 0.68 | 1,815,867 | 5,372 | 1.19 | ||||||||||||||||
Short-term borrowings |
45,846 | 20 | 0.17 | 205,983 | 1,104 | 2.16 | ||||||||||||||||
Zero-coupon convertible subordinated notes (6) |
| | | 133,822 | 876 | 2.63 | ||||||||||||||||
3.875% convertible senior notes (6) |
245,522 | 3,506 | 5.73 | 225,976 | 3,149 | 5.60 | ||||||||||||||||
Junior subordinated debentures |
55,938 | 893 | 6.40 | 53,090 | 540 | 4.09 | ||||||||||||||||
Senior and subordinated notes |
562,990 | 2,575 | 1.83 | 531,086 | 4,874 | 3.69 | ||||||||||||||||
Other long-term debt |
80,945 | 276 | 1.37 | 152,386 | 1,152 | 3.04 | ||||||||||||||||
Total interest-bearing liabilities |
4,290,989 | 12,875 | 1.20 | 3,118,210 | 17,067 | 2.20 | ||||||||||||||||
Portion of noninterest-bearing funding sources |
5,690,959 | 3,135,839 | ||||||||||||||||||||
Total funding sources |
9,981,948 | 12,875 | 0.52 | 6,254,049 | 17,067 | 1.10 | ||||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||||
Demand deposits |
5,132,849 | 2,832,956 | ||||||||||||||||||||
Other liabilities |
181,421 | 243,316 | ||||||||||||||||||||
Discount on zero-coupon convertible subordinated notes (6) |
| 336 | ||||||||||||||||||||
SVBFG stockholders equity (6) |
1,014,192 | 680,927 | ||||||||||||||||||||
Noncontrolling interests (7) |
308,515 | 282,285 | ||||||||||||||||||||
Portion used to fund interest-earning assets |
(5,690,959 | ) | (3,135,839 | ) | ||||||||||||||||||
Total liabilities, noncontrolling interest, and SVBFG stockholders equity |
$ | 10,927,966 | $ | 7,158,030 | ||||||||||||||||||
Net interest income and margin (6) |
$ | 92,235 | 3.71 | % | $ | 87,377 | 5.62 | % | ||||||||||||||
Total deposits |
$ | 8,432,597 | $ | 4,648,823 | ||||||||||||||||||
Average SVBFG stockholders' equity as a percentage of average assets |
9.28 | % | 9.51 | % | ||||||||||||||||||
Reconciliation to reported net interest income: |
||||||||||||||||||||||
Adjustments for taxable equivalent basis |
(554 | ) | (581 | ) | ||||||||||||||||||
Net interest income, as reported |
$ | 91,681 | $ | 86,796 | ||||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $174.2 million and $99.2 million for the three months ended June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009, balance also includes $3.1 billion deposited at the Federal Reserve Bank, earning interest at the Federal Funds target rate. |
(2) | Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income. |
(3) | Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35.0 percent for all periods presented. |
(4) | Nonaccrual loans are reflected in the average balances of loans. |
(5) | Average investment securities of $470.4 million and $373.3 million for the three months ended June 30, 2009 and 2008, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities. |
(6) | Amounts for all periods presented reflect our adoption of FSP APB No. 14-1. Amounts for the three months ended June 30, 2008 have been retrospectively adjusted. |
(7) | Our 2009 adoption of SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160) required us to clarify our presentation of noncontrolling interests and had no effect on our results of operations or stockholders equity. |
40
Average Balances, Rates and Yields for the Six Months Ended June 30, 2009 and 2008
Six months ended June 30, | ||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||
(Dollars in thousands) |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1) |
$ | 3,099,153 | $ | 4,861 | 0.32 | % | $ | 536,392 | $ | 7,801 | 2.92 | % | ||||||||||
Investment securities: (2) |
||||||||||||||||||||||
Taxable |
1,544,728 | 31,645 | 4.13 | 1,203,594 | 28,356 | 4.74 | ||||||||||||||||
Non-taxable (3) |
104,701 | 3,216 | 6.19 | 96,175 | 3,101 | 6.48 | ||||||||||||||||
Total loans, net of unearned income (4) |
4,947,180 | 172,499 | 7.03 | 4,216,381 | 174,274 | 8.31 | ||||||||||||||||
Total interest-earning assets |
9,695,762 | 212,221 | 4.41 | 6,052,542 | 213,532 | 7.09 | ||||||||||||||||
Cash and due from banks |
259,482 | 262,773 | ||||||||||||||||||||
Allowance for loan losses |
(112,090 | ) | (50,526 | ) | ||||||||||||||||||
Goodwill |
2,013 | 4,092 | ||||||||||||||||||||
Other assets (5) |
848,322 | 686,102 | ||||||||||||||||||||
Total assets (6) |
$ | 10,693,489 | $ | 6,954,983 | ||||||||||||||||||
Funding sources: |
||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||
NOW deposits |
$ | 46,496 | $ | 86 | 0.37 | % | $ | 44,570 | $ | 108 | 0.49 | % | ||||||||||
Regular money market deposits |
165,924 | 480 | 0.58 | 144,596 | 957 | 1.33 | ||||||||||||||||
Bonus money market deposits |
947,246 | 3,038 | 0.65 | 887,361 | 5,702 | 1.29 | ||||||||||||||||
Foreign money market deposits |
56,791 | 252 | 0.89 | | | | ||||||||||||||||
Time deposits |
372,823 | 1,351 | 0.73 | 365,776 | 1,686 | 0.93 | ||||||||||||||||
Sweep deposits |
1,706,195 | 7,245 | 0.86 | 233,338 | 2,188 | 1.89 | ||||||||||||||||
Total interest-bearing deposits |
3,295,475 | 12,452 | 0.76 | 1,675,641 | 10,641 | 1.28 | ||||||||||||||||
Short-term borrowings |
46,442 | 41 | 0.18 | 220,464 | 2,915 | 2.66 | ||||||||||||||||
Zero-coupon convertible subordinated notes (6) |
| | | 140,729 | 2,418 | 3.46 | ||||||||||||||||
3.875% convertible senior notes (6) |
245,157 | 7,011 | 5.77 | 111,415 | 3,149 | 5.68 | ||||||||||||||||
Junior subordinated debentures |
55,930 | 1,679 | 6.05 | 53,030 | 1,265 | 4.80 | ||||||||||||||||
Senior and subordinated notes |
565,583 | 5,982 | 2.13 | 531,731 | 11,728 | 4.44 | ||||||||||||||||
Other long-term debt |
91,050 | 738 | 1.63 | 152,511 | 2,756 | 3.63 | ||||||||||||||||
Total interest-bearing liabilities |
4,299,637 | 27,903 | 1.31 | 2,885,521 | 34,872 | 2.43 | ||||||||||||||||
Portion of noninterest-bearing funding sources |
5,396,125 | 3,167,021 | ||||||||||||||||||||
Total funding sources |
9,695,762 | 27,903 | 0.58 | 6,052,542 | 34,872 | 1.15 | ||||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||||
Demand deposits |
4,886,071 | 2,866,278 | ||||||||||||||||||||
Other liabilities |
183,124 | 244,411 | ||||||||||||||||||||
Discount on zero-coupon convertible subordinated notes (6) |
| 1,007 | ||||||||||||||||||||
SVBFG stockholders equity (6) |
1,011,164 | 685,791 | ||||||||||||||||||||
Noncontrolling interests (7) |
313,493 | 271,975 | ||||||||||||||||||||
Portion used to fund interest-earning assets |
(5,396,125 | ) | (3,167,021 | ) | ||||||||||||||||||
Total liabilities, noncontrolling interest, and SVBFG stockholders equity |
$ | 10,693,489 | $ | 6,954,983 | ||||||||||||||||||
Net interest income and margin (6) |
$ | 184,318 | 3.83 | % | $ | 178,660 | 5.94 | % | ||||||||||||||
Total deposits |
$ | 8,181,546 | $ | 4,541,919 | ||||||||||||||||||
Average SVBFG stockholders' equity as a percentage of average assets |
9.46 | % | 9.86 | % | ||||||||||||||||||
Reconciliation to reported net interest income: |
||||||||||||||||||||||
Adjustments for taxable equivalent basis |
(1,126 | ) | (1,086 | ) | ||||||||||||||||||
Net interest income, as reported |
$ | 183,192 | $ | 177,574 | ||||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $177.1 million and $91.0 million for the six months ended June 20, 2009 and 2008, respectively. For the six months ended June 30, 2009, balance also includes $2.8 billion deposited at the Federal Reserve Bank, earning interest at the Federal Funds target rate. |
(2) | Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income. |
(3) | Interest income on non-taxable investments is presented on a fully taxable equivalent basis using the federal statutory income tax rate of 35.0 percent for all periods presented. |
(4) | Nonaccrual loans are reflected in the average balances of loans. |
(5) | Average investment securities of $468.7 million and $359.3 million for the six months ended June 30, 2009 and 2008, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities. |
(6) | Amounts for all periods presented reflect our adoption of FSP APB No. 14-1. Amounts for the six months ended June 30, 2008 have been retrospectively adjusted. |
(7) | Our 2009 adoption of SFAS No. 160 required us to clarify our presentation of noncontrolling interests and had no effect on our results of operations or stockholders equity. |
41
Provision for Loan Losses
Our provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total gross loans and on our periodic assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans. We consider our allowance for loan losses of $110.5 million adequate to cover credit losses inherent in the loan portfolio at June 30, 2009. The following table summarizes our provision for loan losses for the three and six months ended June 30, 2009 and 2008, respectively:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Allowance for loan losses, beginning balance |
$ | 110,010 | $ | 49,636 | $ | 107,396 | $ | 47,293 | ||||||||
Provision for loan losses |
21,393 | 8,351 | 64,859 | 16,074 | ||||||||||||
Gross loan charge-offs |
(21,898 | ) | (9,098 | ) | (63,911 | ) | (15,306 | ) | ||||||||
Loan recoveries |
968 | 3,999 | 2,129 | 4,827 | ||||||||||||
Allowance for loan losses, ending balance |
$ | 110,473 | $ | 52,888 | $ | 110,473 | $ | 52,888 | ||||||||
Provision as a percentage of total gross loans (annualized) |
1.76 | % | 0.72 | % | 2.68 | % | 0.69 | % | ||||||||
Gross loan charge-offs as a percentage of average total gross loans (annualized) |
1.82 | 0.84 | 2.58 | 0.73 | ||||||||||||
Net loan charge-offs as a percentage of average total gross loans (annualized) |
1.74 | 0.47 | 2.50 | 0.50 | ||||||||||||
Allowance for loan losses as a percentage of total gross loans |
2.26 | 1.13 | 2.26 | 1.13 | ||||||||||||
Total gross loans at period-end |
$ | 4,886,040 | $ | 4,666,989 | $ | 4,886,040 | $ | 4,666,989 | ||||||||
Average total gross loans |
4,820,855 | 4,349,545 | 4,989,385 | 4,245,479 |
Our provision for loan losses increased by $13.0 million to $21.4 million for the three months ended June 30, 2009, compared to $8.4 million for the comparable 2008 period. Our provision of $21.4 million for the three months ended June 30, 2009 was primarily attributable to the following:
|
Gross loan charge-offs of $21.9 million primarily from our life sciences, software and private client services portfolios. |
|
Loan recoveries of $1.0 million, primarily from our software and hardware industry portfolios. |
Our provision for loan losses increased by $48.8 million to $64.9 million for the six months ended June 30, 2009, compared to $16.1 million for the comparable 2008 period. Our provision of $64.9 million for the six months ended June 30, 2009 was primarily attributable to the following
|
Gross loan charge-offs of $23.1 million and specific reserves of $9.2 million related to two loans within our hardware industry portfolio. |
|
Gross loan charge-offs of $40.8 million primarily from our life sciences, software and private client services portfolios. |
|
A reversal of $4.9 million in specific reserves due to the repayment by affiliates of HRJ Capital, LLC (HRJ) of certain outstanding balances on capital call lines of credit during the first quarter of 2009. |
|
Loan recoveries of $2.1 million, primarily from our software and hardware industry portfolios. |
|
Our net loan charge-offs as a percentage of average total gross loans (annualized) was 2.50 percent for the six months ended June 30, 2009, compared to our allowance for loan losses as a percentage of total gross loans of 2.26 percent. We expect net charge-offs for the full year 2009 to be lower than the annualized trend indicated by the first half of 2009 results. |
On July 15, 2009, an independent asset management firm announced that it had closed its transaction with HRJ to assume the management of HRJs private equity and real estate funds of funds. The transaction included the restructuring of the debt obligations owed to us by HRJ and its affiliates. Subject to final review of the accounting impact of the transaction, we do not expect the transaction will have any material impact on our net income and provision for loan losses for the third quarter of 2009.
At the end of the second quarter of 2009, we entered into an agreement for a transaction, which is expected to result in a recovery of approximately $11.5 million, on a pre-tax basis, from a single loan previously charged-off in the first quarter of 2009. The final transaction and our receipt of the transaction proceeds are subject to the satisfaction of various closing conditions. We currently expect that the transaction will close during the third quarter of 2009.
42
Noninterest Income
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 * | % Change | 2009 | 2008 * | % Change | |||||||||||||||
Foreign exchange fees |
$ | 7,617 | $ | 7,961 | (4.3 | )% | $ | 15,083 | $ | 15,805 | (4.6 | )% | |||||||||
Deposit service charges |
6,590 | 6,056 | 8.8 | 13,413 | 11,947 | 12.3 | |||||||||||||||
Client investment fees |
5,580 | 13,648 | (59.1 | ) | 11,828 | 27,370 | (56.8 | ) | |||||||||||||
Letters of credit and standby letters of credit income |
2,329 | 3,142 | (25.9 | ) | 5,221 | 6,088 | (14.2 | ) | |||||||||||||
Credit card fees |
2,957 | 1,502 | 96.9 | 4,396 | 3,202 | 37.3 | |||||||||||||||
Corporate finance fees |
| | | | 3,640 | (100.0 | ) | ||||||||||||||
(Losses) gains on derivative instruments, net |
(2,847 | ) | 4,408 | (164.6 | ) | (1,033 | ) | 7,007 | (114.7 | ) | |||||||||||
(Losses) gains on investment securities, net |
(6,750 | ) | 2,039 | NM | (41,795 | ) | (4,073 | ) | NM | ||||||||||||
Other |
12,799 | 5,759 | 122.2 | 15,581 | 15,281 | 2.0 | |||||||||||||||
Total noninterest income |
$ | 28,275 | $ | 44,515 | (36.5 | ) | $ | 22,694 | $ | 86,267 | (73.7 | ) | |||||||||
NM- Not meaningful
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts the three and six months ended June 30, 2008 have been revised. |
Included in net income (loss) is income and expense attributable to noncontrolling interests. We recognize, as part of our investment funds management business through SVB Capital and Sponsored Funds and Strategic Investments, the entire income or loss from funds where we own significantly less than 100%. We also recognize, as part of our equity valuation business through SVB Analytics, the results of eProsper, of which we own 65%. We are required under GAAP to consolidate 100% of the results of entities that we are deemed to control, even though we may own less than 100% of such entities. The relevant amounts attributable to investors other than us are reflected under Net Loss Attributable to Noncontrolling Interests on our statements of income. The non-GAAP tables presented below, for noninterest income, net losses on investment securities and noninterest expense, all exclude noncontrolling interests. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that represent income attributable to investors other than us and our subsidiaries. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP.
The following table provides a summary of non-GAAP noninterest income, net of noncontrolling interests:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||
Non-GAAP noninterest income, net of noncontrolling interests
|
2009 | 2008 * | % Change | 2009 | 2008 * | % Change | |||||||||||||||
GAAP noninterest income |
$ | 28,275 | $ | 44,515 | (36.5 | )% | $ | 22,694 | $ | 86,267 | (73.7 | )% | |||||||||
Less: (losses) income attributable to noncontrolling interests, including carried interest |
(6,097 | ) | 817 | NM | (36,689 | ) | (899 | ) | NM | ||||||||||||
Non-GAAP noninterest income, net of noncontrolling interests |
$ | 34,372 | $ | 43,698 | (21.3 | ) | $ | 59,383 | $ | 87,166 | (31.9 | ) | |||||||||
NM- Not meaningful
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts the three and six months ended June 30, 2008 have been revised. |
Foreign Exchange Fees
Foreign exchange fees were $7.6 million and $15.1 million for the three and six months ended June 30, 2009, compared to $8.0 million and $15.8 million for the comparable 2008 periods. The decreases were primarily due to lower commissioned notional volumes, which decreased to $1.1 billion and $2.1 billion for the three and six months ended June 30, 2009, compared to $1.9 billion and $3.3 billion for the comparable 2008 periods. While commissioned notional volumes decreased, fees remained stable as a substantially higher proportion of that volume came from trades with notional amounts less than $1 million for the three and six months ended June 30, 2009, which carry comparatively higher commission rates.
Deposit Service Charges
Deposit service charges were $6.6 million and $13.4 million for the three and six months ended June 30, 2009, compared to $6.1 million and $11.9 million for the comparable 2008 periods. The increases were primarily attributable to a decrease in the earnings credit rate related to decreases in short-term market interest rates in the latter half of 2008.
43
Client Investment Fees
Client investment fees were $5.6 million and $11.8 million for the three and six months ended June 30, 2009, respectively, compared to $13.6 million and $27.4 million for the comparable 2008 periods. The decreases were primarily attributable to lower margins earned on certain products owing to historically low rates in the short-term fixed income markets, as well as a decrease in average client investment funds. During the latter half of the fourth quarter of 2008, we discontinued offering a third party off-balance sheet sweep product, primarily due to our decision to utilize our own on-balance sheet sweep product. In addition, we continue to face challenges in growing off-balance sheet funds due to the significant decline of initial public offerings (IPO), resulting in less client funds available for investment. Based on the expectation of continued lower margins on certain client investment products, we expect to continue to see declining client investment fees throughout 2009. The following table summarizes average client investment funds for the three and six months ended June 30, 2009 and 2008, respectively:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
(Dollars in millions) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||
Client directed investment assets (1) |
$ | 11,039 | $ | 12,734 | (13.3 | )% | $ | 11,341 | $ | 12,754 | (11.1 | )% | ||||||
Client investment assets under management |
5,412 | 6,006 | (9.9 | ) | 5,623 | 6,190 | (9.2 | ) | ||||||||||
Sweep money market funds |
| 2,649 | (100.0 | ) | 112 | 2,698 | (95.8 | ) | ||||||||||
Total average client investment funds (2) |
$ | 16,451 | $ | 21,389 | (23.1 | ) | $ | 17,076 | $ | 21,642 | (21.1 | ) | ||||||
(1) | Mutual funds and Repurchase Agreement Program assets. |
(2) | Client investment funds are maintained at third-party financial institutions. |
Period-end total client investment funds were $16.0 billion at June 30, 2009, compared to $18.6 billion at December 31, 2008.
Credit Card Fees
Credit card fees were $3.0 million and $4.4 million for the three and six months ended June 30, 2009, respectively, compared to $1.5 million and $3.2 million for the comparable 2008 periods. The increases were primarily due to the purchase of our credit card portfolio in the first quarter of 2009, as we began to process our credit card business in-house. Refer to Note 12- Off-Balance Sheet Arrangements, Guarantees and Other Commitments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details.
Corporate Finance Fees
There were no corporate finance fees in the three or six months ended June 30, 2009, compared to $3.6 million for the six months ended June 30, 2008. The decrease was a result of the decision to cease operations at SVB Alliant in July 2007. The $3.6 million in fees for the six months ended June 30, 2008 represented the completion of all remaining client transactions at SVB Alliant as of March 31, 2008.
(Losses) Gains on Derivative Instruments, Net
A summary of (losses) gains on derivative instruments, net, for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
(Losses) gains on foreign exchange forward contracts, net: |
||||||||||||||||||||||
Gains on client foreign exchange contracts, net (1) |
$ | 448 | $ | 478 | (6.3 | )% | $ | 944 | $ | 1,206 | (21.7 | )% | ||||||||||
(Losses) gains on internal foreign exchange contracts, net (2) |
(4,479 | ) | 624 | NM | (2,536 | ) | (2,467 | ) | 2.8 | |||||||||||||
Total (losses) gains on foreign exchange forward contracts, net |
(4,031 | ) | 1,102 | NM | (1,592 | ) | (1,261 | ) | 26.2 | |||||||||||||
Change in fair value of interest rate swap (3) |
| 879 | (100.0 | ) | (170 | ) | 386 | (144.0 | ) | |||||||||||||
Gains on covered call options (4) |
| 377 | (100.0 | ) | | 377 | (100.0 | ) | ||||||||||||||
Equity warrant assets: |
||||||||||||||||||||||
Gains on exercise, net |
(42 | ) | 676 | (106.2 | ) | 168 | 5,192 | (96.8 | ) | |||||||||||||
Change in fair value (5): |
||||||||||||||||||||||
Cancellations and expirations |
(1,276 | ) | (488 | ) | 161.5 | (2,474 | ) | (945 | ) | 161.8 | ||||||||||||
Other changes in fair value |
2,502 | 1,862 | 34.4 | 3,035 | 3,258 | (6.8 | ) | |||||||||||||||
Total net gains on equity warrant assets (6) |
1,184 | 2,050 | (42.2 | ) | 729 | 7,505 | (90.3 | ) | ||||||||||||||
Total (losses) gains on derivative instruments, net |
$ | (2,847 | ) | $ | 4,408 | (164.6 | ) | $ | (1,033 | ) | $ | 7,007 | (114.7 | ) | ||||||||
NM- Not meaningful
(1) | Represents the net gains for foreign exchange forward contracts executed on behalf of clients. |
(2) | Represents the change in the fair value of foreign exchange forward contracts used to economically reduce our foreign exchange exposure risk related to certain foreign currency denominated loans. Revaluations of foreign currency denominated loans are recorded on the line item Other as part of noninterest income, a component of consolidated net income (loss). |
(3) | Represents the change in the fair value hedge of the junior subordinated debentures. In December 2008, our counterparty called this swap for settlement in January 2009. As a result, the swap was terminated and no longer designated as a hedging instrument. |
(4) | Represents net gains on covered call options by one of our sponsored debt funds. |
(5) | At June 30, 2009, we held warrants in 1,285 companies, compared to 1,217 companies at June 30, 2008. |
44
(6) | Includes net gains on equity warrant assets held by consolidated investment affiliates. Relevant amounts attributable to noncontrolling interests are reflected in the interim consolidated statements of income under the caption Net Loss Attributable to Noncontrolling Interests. |
Losses on derivative instruments, net, were $2.8 million for the three months ended June 30, 2009, compared to net gains of $4.4 million for the comparable 2008 period. The decrease of $7.2 million was primarily due to net losses from changes in the fair value of foreign exchange forward contracts and lower net gains on equity warrant assets.
Net losses from foreign exchange forward contracts included $4.5 million in net losses from changes in fair value due to the decline of the U.S. dollar in the second quarter of 2009 against the Pound Sterling, used to offset net gains of $4.7 million from revaluation of our foreign currency denominated loans, which are included in other noninterest income. Net gains on equity warrant assets of $1.2 million for the three months ended June 30, 2009 were driven by net gains of $3.7 million from share price increases of certain investments in our public warrant portfolio, partially offset by net losses of $1.2 million from valuation decreases in our private warrant portfolio and $1.3 million from warrant terminations.
Losses on derivative instruments, net, were $1.0 million for the six months ended June 30, 2009, compared to net gains of $7.0 million for the comparable 2008 period. The decrease of $8.0 million was primarily due to lower gains upon exercise of equity warrant assets and higher terminations.
The lower gains on exercise of equity warrant assets for the six months ended June 30, 2009, compared to the comparable 2008 period was primarily due to the sale of one warrant position in the first quarter of 2008. The higher warrant terminations for the three and six months ended June 30, 2009, compared to the comparable 2008 periods, reflected the continuing effects of the downturn in the overall economy.
(Losses) Gains on Investment Securities, Net
We experience variability in the performance of our consolidated investment funds from quarter to quarter due to a number of factors, including changes in the values of our funds investments, changes in the amount of distributions and general economic and market conditions. Such variability may lead to volatility in the gains (losses) from investment securities and cause our results for a particular period not to be indicative of our performance in a future period. The valuation of our consolidated investment funds continues to be affected by a more challenging venture capital environment, a significant slowdown of merger and acquisition (M&A) activities and effectively a halt in IPOs among our portfolio companies in 2008 and the first half of 2009. The net losses for the three and six months ended June 30, 2009 were primarily due to lower valuations of private companies from the overall impact of lower than expected operating results, lower comparative valuations from other private companies, and declines in the public equity markets, reflective of the current economic slowdown throughout the venture capital/private equity community. As a result, we saw more unrealized losses in the three and six months ended June 30, 2009, compared to the comparable 2008 periods. The following tables provide a summary of net (losses) gains on investment securities for the three and six months ended June 30, 2009 and 2008:
45
Three months ended June 30, 2009 | ||||||||||||||||||||
(Dollars in thousands) |
Managed Co-
Investment Funds |
Managed
Funds Of Funds |
Debt Funds | Other | Total | |||||||||||||||
Unrealized (losses) gains |
$ | (1,691 | ) | $ | (6,469 | ) | $ | 798 | $ | | $ | (7,362 | ) | |||||||
Realized (losses) gains |
(907 | ) | 1,174 | 883 | (538 | ) | 612 | |||||||||||||
Total (losses) gains on investment securities, net |
$ | (2,598 | ) | $ | (5,295 | ) | $ | 1,681 | $ | (538 | ) | $ | (6,750 | ) | ||||||
Less: (losses) income attributable to noncontrolling interests, including carried interest |
(2,414 | ) | (4,831 | ) | 312 | | (6,933 | ) | ||||||||||||
Non-GAAP net (losses) gains on investment securities, net of noncontrolling interests |
$ | (184 | ) | $ | (464 | ) | $ | 1,369 | $ | (538 | ) | $ | 183 | |||||||
Three months ended June 30, 2008 | ||||||||||||||||||||
(Dollars in thousands) |
Managed Co-
Investment Funds |
Managed
Funds Of Funds |
Debt Funds | Other | Total | |||||||||||||||
Unrealized (losses) gains |
$ | (1,620 | ) | $ | (5,015 | ) | $ | 1,554 | $ | | $ | (5,081 | ) | |||||||
Realized gains (losses) |
4,124 | 3,297 | 696 | (997 | ) | 7,120 | ||||||||||||||
Total gains (losses) on investment securities, net |
$ | 2,504 | $ | (1,718 | ) | $ | 2,250 | $ | (997 | ) | $ | 2,039 | ||||||||
Less: income (losses) attributable to noncontrolling interests, including carried interest |
2,180 | (2,433 | ) | 705 | | 452 | ||||||||||||||
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests |
$ | 324 | $ | 715 | $ | 1,545 | $ | (997 | ) | $ | 1,587 | |||||||||
Six months ended June 30, 2009 | ||||||||||||||||||||
(Dollars in thousands) |
Managed Co-
Investment Funds |
Managed
Funds Of Funds |
Debt Funds | Other | Total | |||||||||||||||
Unrealized (losses) gains |
$ | (6,388 | ) | $ | (37,548 | ) | $ | 1,782 | $ | | $ | (42,154 | ) | |||||||
Realized (losses) gains |
(1,430 | ) | 2,057 | 1,123 | (1,391 | ) | 359 | |||||||||||||
Total (losses) gains on investment securities, net |
$ | (7,818 | ) | $ | (35,491 | ) | $ | 2,905 | $ | (1,391 | ) | $ | (41,795 | ) | ||||||
Less: (losses) income attributable to noncontrolling interests, including carried interest |
(7,191 | ) | (30,936 | ) | 756 | | (37,371 | ) | ||||||||||||
Non-GAAP net (losses) gains on investment securities, net of noncontrolling interests |
$ | (627 | ) | $ | (4,555 | ) | $ | 2,149 | $ | (1,391 | ) | $ | (4,424 | ) | ||||||
Six months ended June 30, 2008 | ||||||||||||||||||||
(Dollars in thousands) |
Managed Co-
Investment Funds |
Managed
Funds Of Funds |
Debt Funds | Other | Total | |||||||||||||||
Unrealized (losses) gains |
$ | (2,292 | ) | $ | (4,117 | ) | $ | (6,284 | ) | $ | | $ | (12,693 | ) | ||||||
Realized gains (losses) |
4,672 | 5,182 | 572 | (1,806 | ) | 8,620 | ||||||||||||||
Total gains (losses) on investment securities, net |
$ | 2,380 | $ | 1,065 | $ | (5,712 | ) | $ | (1,806 | ) | $ | (4,073 | ) | |||||||
Less: income (losses) attributable to noncontrolling interests, including carried interest |
2,124 | 122 | (3,693 | ) | | (1,447 | ) | |||||||||||||
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests |
$ | 256 | $ | 943 | $ | (2,019 | ) | $ | (1,806 | ) | $ | (2,626 | ) | |||||||
46
Other Noninterest Income
A summary of other noninterest income for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 * | % Change | 2009 | 2008 * | % Change | |||||||||||||
Fund management fees |
$ | 2,471 | $ | 1,957 | 26.3 | % | $ | 5,188 | $ | 3,877 | 33.8 | % | |||||||
Service-based fee income (1) |
2,116 | 2,266 | (6.6 | ) | 3,945 | 4,256 | (7.3 | ) | |||||||||||
Gains (losses) on foreign currency loans revaluation, net |
4,657 | (1,992 | ) | NM | 1,980 | 1,915 | 3.4 | ||||||||||||
Other |
3,555 | 3,528 | 0.8 | 4,468 | 5,233 | (14.6 | ) | ||||||||||||
Total other noninterest income |
$ | 12,799 | $ | 5,759 | 122.2 | $ | 15,581 | $ | 15,281 | 2.0 | |||||||||
NM- Not meaningful
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for the three and six months ended June 30, 2008 have been revised. |
(1) | Includes income from SVB Analytics and its subsidiary, eProsper. |
Other noninterest income was $12.8 million and $15.6 million for the three and six months ended June 30, 2009, compared to $5.8 million and $15.3 million for the comparable 2008 periods. The increase of $7.0 million for the three months ended June 30, 2009, compared to the comparable 2008 period was primarily due to revaluations of foreign currency denominated loans. Net gains from revaluation of foreign currency denominated loans of $4.7 million for the three months ended June 30 2009 were due primarily to the decline of the U.S. dollar against the Pound Sterling, and were partially offset by net losses from foreign exchange forward contracts of $4.5 million, which are included in net (losses) gains on derivative instruments.
Fund management fees were $2.5 million and $5.2 million for the three and six months ended June 30, 2009, respectively, compared to $2.0 million and $3.9 million for the comparable 2008 periods. The increases in fund management fees were primarily due to the closings of a fund in the SVB Strategic Investors Fund family in the fourth quarter of 2008 and the first quarter of 2009. Typically, a fund of funds is formed through multiple closing transactions in which limited partners enter into investment commitments.
Noninterest Expense
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||
Compensation and benefits |
$ | 46,894 | $ | 50,059 | (6.3 | )% | $ | 95,174 | $ | 103,840 | (8.3 | )% | ||||||||
Professional services |
11,258 | 9,132 | 23.3 | 23,338 | 17,933 | 30.1 | ||||||||||||||
FDIC assessments |
8,589 | 700 | NM | 11,264 | 1,136 | NM | ||||||||||||||
Premises and equipment |
5,473 | 5,455 | 0.3 | 10,880 | 10,643 | 2.2 | ||||||||||||||
Net occupancy |
4,836 | 4,342 | 11.4 | 9,141 | 8,690 | 5.2 | ||||||||||||||
Business development and travel |
3,152 | 3,764 | (16.3 | ) | 6,425 | 7,186 | (10.6 | ) | ||||||||||||
Impairment of goodwill |
| | | 4,092 | | | ||||||||||||||
Correspondent bank fees |
1,963 | 1,816 | 8.1 | 3,876 | 3,322 | 16.7 | ||||||||||||||
Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes |
| 3,858 | (100.0 | ) | | 3,858 | (100.0 | ) | ||||||||||||
(Reduction of) provision for unfunded credit commitments |
(1,147 | ) | 800 | NM | (3,431 | ) | 635 | NM | ||||||||||||
Other |
7,994 | 7,263 | 10.1 | 15,393 | 13,383 | 15.0 | ||||||||||||||
Total noninterest expense |
$ | 89,012 | $ | 87,189 | 2.1 | $ | 176,152 | $ | 170,626 | 3.2 | ||||||||||
NM- Not meaningful
We use and report non-GAAP noninterest expense and a non-GAAP operating efficiency ratio, which excludes noncontrolling interests. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that represent expense attributable to investors other than us and our subsidiaries. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. The table below provides a summary of non-GAAP noninterest expense and non-GAAP operating efficiency ratio, both net of noncontrolling interests:
47
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
Non-GAAP operating efficiency ratio, net of noncontrolling interests (Dollars in thousands, except ratios) |
2009 | 2008 * | % Change | 2009 | 2008 * | % Change | ||||||||||||||||
GAAP noninterest expense |
$ | 89,012 | $ | 87,189 | 2.1 | % | $ | 176,152 | $ | 170,626 | 3.2 | % | ||||||||||
Less: amounts attributable to noncontrolling interests |
2,848 | 2,457 | 15.9 | 6,235 | 5,216 | 19.5 | ||||||||||||||||
Non-GAAP noninterest expense, net of noncontrolling interests |
$ | 86,164 | $ | 84,732 | 1.7 | $ | 169,917 | $ | 165,410 | 2.7 | ||||||||||||
GAAP taxable equivalent net interest income |
$ | 92,235 | $ | 87,377 | 5.6 | $ | 184,318 | $ | 178,660 | 3.2 | ||||||||||||
Less: (losses) income attributable to noncontrolling interests |
(16 | ) | 106 | (115.1 | ) | (30 | ) | 363 | (108.3 | ) | ||||||||||||
Non-GAAP taxable equivalent net interest income, net of noncontrolling interests |
92,251 | 87,271 | 5.7 | 184,348 | 178,297 | 3.4 | ||||||||||||||||
Non-GAAP noninterest income, net of noncontrolling interests |
34,372 | 43,698 | (21.3 | ) | 59,383 | 87,166 | (31.9 | ) | ||||||||||||||
Non-GAAP taxable equivalent revenue, net of noncontrolling interests |
$ | 126,623 | $ | 130,969 | (3.3 | ) | $ | 243,731 | $ | 265,463 | (8.2 | ) | ||||||||||
Non-GAAP operating efficiency ratio |
68.05 | % | 64.70 | % | 5.2 | 69.71 | % | 62.31 | % | 11.9 | ||||||||||||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for the three and six months ended June 30, 2008 have been revised. |
Compensation and Benefits
Compensation and benefits expense was $46.9 million for the three months ended June 30, 2009, compared to $50.1 million for the comparable 2008 period. The decrease of $3.2 million was largely due to a decrease of $7.7 million in expenses related to our Incentive Compensation Plan and Employee Stock Ownership Plan (ESOP), as a result of our lower than expected actual first and second quarter 2009 results. These decreases were partially offset by increases of $2.1 million in salaries and wages expense, primarily related to an increase in the average number of full-time equivalent (FTE) personnel. The average number of FTE personnel increased to 1,258 for the three months ended June 30, 2009, compared to 1,201 for the comparable 2008 period. The increase in average FTE was primarily attributable to increases in sales and advisory positions to support our Global Commercial Bank operations, as well as from increases at SVB Capital and SVB Analytics to support our growth in these businesses.
Compensation and benefits expense was $95.2 million for the six months ended June 30, 2009, compared to $103.8 million for the comparable 2008 period. The decrease of $8.6 million was largely due to a decrease of $15.7 million in expenses related to our Incentive Compensation Plan and Employee Stock Ownership Plan (ESOP), as a result of our lower than expected actual first and second quarter 2009 results. These decreases were partially offset by increases of $5.3 million in salaries and wages expense, primarily related to an increase in the average number FTE personnel. The average number of FTE personnel increased to 1,258 for the six months ended June 30, 2009, compared to 1,187 for the comparable 2008 period.
Our variable compensation plans primarily consist of the Incentive Compensation Plans, Direct Drive Incentive Compensation Plan, SVB Financial Group 401(k), ESOP, Retention Program and Warrant Incentive Plan. Total costs incurred under the above plans were $7.1 million and $14.5 million for the three and six months ended June 30, 2009, compared to $14.6 million and $31.1 million for the comparable 2008 periods.
Professional Services
Professional services expense was $11.3 million and $23.3 million for the three and six months ended June 30, 2009, compared to $9.1 million and $17.9 million for the comparable 2008 periods. The increases of $2.2 million and $5.4 million were primarily due to consulting fees related to certain infrastructure projects.
FDIC Assessments
FDIC assessments were $8.6 million and $11.3 for the three and six months ended June 30, 2009, compared to $0.7 million and $1.1 million for the comparable 2008 periods. The increases of $7.9 million and $10.2 million were primarily due to a special assessment fee of $5.0 million, mandated for all banks by the FDIC, an increase in average deposit balances, and an increase in fee rates.
Impairment of Goodwill
We review goodwill for possible impairment on an annual basis, and we also monitor for any impairment triggering events quarterly. As such, as part of our quarterly review of goodwill during the three months ended March 31, 2009, we noted an impairment resulting from a change in our outlook for eProspers future financial performance. As a result, we recognized a non-cash non-tax deductible charge of $4.1 million relating to the impairment of goodwill in the first quarter of 2009.
(Reduction of) Provision for Unfunded Credit Commitments
We calculate the (reduction of) provision for unfunded credit commitments based on the credit commitments outstanding, as well as the credit quality of our loan commitments. We recorded a (reduction of) provision of $1.1 million for the three months ended June 30, 2009, compared to a provision of $0.8 million for the comparable 2008 period. The (reduction of) provision for the three months ended June 30, 2009 was reflective of a decrease in the balance of our total unfunded credit commitments due to expirations and reductions in credit lines to certain clients, as well as lower utilization of commitments by borrowers. Total unfunded credit commitments were $5.0 billion at June 30, 2009, compared to $5.1 billion at March 31, 2009.
48
We recorded a (reduction of) provision of $3.4 million for the six months ended June 30, 2009,
compared to a provision of $0.6 million for the comparable 2008 period. The (reduction of) provision for the six months ended June 30, 2009 was reflective of a decrease in the balance of our total unfunded credit commitments, which
Other Noninterest Expense
A summary of other noninterest expense for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||
Telephone |
$ | 1,337 | $ | 1,345 | (0.6 | )% | $ | 2,717 | $ | 2,497 | 8.8 | % | ||||||
Tax credit fund amortization |
1,164 | 1,059 | 9.9 | 2,293 | 2,041 | 12.3 | ||||||||||||
Data processing services |
1,089 | 1,116 | (2.4 | ) | 2,101 | 2,193 | (4.2 | ) | ||||||||||
Postage and supplies |
821 | 1,024 | (19.8 | ) | 2,079 | 1,778 | 16.9 | |||||||||||
Other |
3,583 | 2,719 | 31.8 | 6,203 | 4,874 | 27.3 | ||||||||||||
Total other noninterest expense |
$ | 7,994 | $ | 7,263 | 10.1 | $ | 15,393 | $ | 13,383 | 15.0 | ||||||||
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests is primarily related to the noncontrolling interest holders portion of investment gains or losses and management fees in our managed funds. Noninterest loss (income) consists primarily of investment gains and losses from our consolidated funds. Noninterest expense is primarily related to management fees paid by our managed funds to the general partner entities at SVB Capital and one of our consolidated sponsored debt funds for funds management. Our adoption of SFAS No. 160 requires us to reclassify our presentation of noncontrolling interests. A summary of net loss attributable to noncontrolling interests for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
Net interest loss (income) (1) |
$ | 16 | $ | (106 | ) | (115.1 | )% | $ | 30 | $ | (363 | ) | (108.3 | )% | ||||||||
Noninterest loss (income) (1) |
6,153 | (1,528 | ) | NM | 38,060 | (553 | ) | NM | ||||||||||||||
Noninterest expense (1) |
2,848 | 2,457 | 15.9 | 6,235 | 5,216 | 19.5 | ||||||||||||||||
Carried interest (2) |
(56 | ) | 711 | (107.9 | ) | (1,371 | ) | 1,452 | (194.4 | ) | ||||||||||||
Net loss attributable to noncontrolling interests |
$ | 8,961 | $ | 1,534 | NM | $ | 42,954 | $ | 5,752 | NM | ||||||||||||
NM- | Not meaningful |
(1) | Represents noncontrolling interests share in net interest income, noninterest income and noninterest expense. |
(2) | Represents the change in the preferred allocation of income we earn as general partners managing two of our managed funds of funds and the preferred allocation earned by the general partner entity managing one of our consolidated sponsored debt funds. |
Income Taxes
Effective January 1, 2009, we adopted SFAS No. 160, which requires us to clearly identify and distinguish between the interests of the Company and the interest of the noncontrolling owners by presenting noncontrolling interests after net income (loss) in our interim consolidated statements of income. As a result, our effective tax rate is calculated by dividing income tax expense by the sum of income (loss) before income tax expense and the net loss attributable to noncontrolling interests.
Our effective tax rate was 38.8 percent for the three months ended June 30, 2009, compared to 43.7 percent for the comparable 2008 period. The decrease in the tax rate was primarily attributable to the $3.9 million non-tax deductible loss recorded in the second quarter of 2008 related to our cash settlement of the early conversion of certain of our zero-coupon convertible subordinated notes.
Our effective tax rate was 60.4 percent for the six months ended June 30, 2009, compared to 41.8 percent for the comparable 2008 period. The increase in the tax rate was primarily attributable to the tax impact of the $4.1 million non-tax deductible goodwill impairment associated with eProsper in the first quarter of 2009.
Operating Segment Results
For management reporting purposes, we have four operating segments: Global Commercial Bank, Relationship Management, SVB Capital and Other Business Services.
49
In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , we report segment information, make decisions and assess performance based on the management approach. Please refer to Note 11-Segment Reporting of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Our primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of funds transfer pricing (FTP), and interest paid on deposits, net of funds transfer pricing. Accordingly, our segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institutions sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised, and an earnings charge is made for funded loans. FTP is calculated by applying a transfer rate to pooled, or aggregated, loan and deposit volumes.
We also evaluate performance based on provision for loan losses, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. In calculating each operating segments noninterest expense, we consider the direct costs incurred by the operating segment as well as certain allocated direct costs. As part of this review, we allocate certain corporate overhead costs to a corporate account. We do not allocate income taxes to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes.
Changes in an individual clients primary relationship designation have resulted, and may in the future result, in the inclusion of certain clients in different segments in different periods. Effective January 1, 2009, we have four operating segments for management reporting purposes: Global Commercial Bank, Relationship Management, SVB Capital and Other Business Services. Previously, we reported based on three operating segments: Commercial Banking, SVB Capital, and Other Business Services. Effective January 1, 2009, we report FDIC assessments in noninterest expense within Global Commercial Bank. Prior to January 1, 2009, FDIC assessments were recognized in noninterest expense under the Reconciling Items column. Additionally, effective January 1, 2009, we report the provision for loan losses by reportable segments. Prior to January 1, 2009, the provision for loan losses was recognized under the Reconciling Items column. We have reclassified all prior period amounts to conform to the current periods presentation. Refer to Note 11-Segment Reporting of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
The following is our segment information for the three and six months ended
Global Commercial Bank
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
Net interest income |
$ | 90,987 | $ | 78,654 | 15.7 | % | $ | 185,246 | $ | 163,303 | 13.4 | % | ||||||||||
Provision for loan losses |
(14,915 | ) | (8,106 | ) | 84.0 | (57,730 | ) | (16,255 | ) | NM | ||||||||||||
Noninterest income |
26,813 | 33,955 | (21.0 | ) | 53,053 | 67,612 | (21.5 | ) | ||||||||||||||
Noninterest expense |
(39,308 | ) | (30,033 | ) | 30.9 | (71,545 | ) | (60,685 | ) | 17.9 | ||||||||||||
Income before income tax expense |
$ | 63,577 | $ | 74,470 | (14.6 | ) | $ | 109,024 | $ | 153,975 | (29.2 | ) | ||||||||||
Total average loans |
$ | 3,775,198 | $ | 3,342,907 | 12.9 | $ | 3,943,712 | $ | 3,268,139 | 20.7 | ||||||||||||
Total average assets |
3,870,134 | 3,389,293 | 14.2 | 4,033,681 | 3,318,181 | 21.6 | ||||||||||||||||
Total average deposits |
8,276,795 | 4,481,342 | 84.7 | 8,014,766 | 4,381,868 | 82.9 |
NM- | Not meaningful |
Three months ended June 30, 2009 compared to the three months ended June 30, 2008
Net interest income from the Global Commercial Bank (GCB) increased by $12.3 million for the three months ended June 30, 2009, primarily due to an increase in net interest income resulting from growth in GCBs loan portfolio, particularly from loans to software, life sciences, and hardware clients, an increase in earnings credit resulting from growth in deposit balances, and an increase in net interest income due to decreases in the earnings charge incurred for funded loans. These increases were partially offset by a decrease in interest income from the earnings credit received on deposits due primarily to decreases in short-term market interest rates, as well as from a decrease in interest income from loans due to a decrease in our average prime-lending rate to 4.00 percent for the three months ended June 30, 2009, compared to 5.08 percent for the comparable 2008 period.
The provision for loan losses for GCB of $14.9 million for the three months ended June 30, 2009 was primarily attributable to gross charge-offs primarily from our life sciences and software industry portfolios.
Noninterest income decreased by $7.1 million for the three months ended June 30, 2009, primarily due to a decrease in client investment fees of $8.1 million. The decrease in client investment fees was primarily attributable to lower margins earned on certain products owing to historically low rates in the short-term fixed income markets, as well as a decrease in average balances of client investment funds.
50
Noninterest expense increased by $9.3 million for the three months ended June 30, 2009, primarily due to an increase in FDIC assessments of $7.9 million and an increase in professional services expense of $1.3 million, partially offset by a decrease in compensation and benefits expense of $2.6 million. The increase in FDIC assessments relates primarily to a special assessment fee of $5.0 million, mandated for all banks by the FDIC, as well an increase in average deposit balances. The increase in professional services expense was primarily due to consulting fees related to certain infrastructure projects. The decrease in compensation and benefits expense was primarily a result of a decrease in our incentive compensation related expenses, resulting from our actual first and second quarter 2009 results being below our expectations, partially offset by an increase in salaries and wages expenses, primarily as a result of growth in the number of average FTE employees at GCB, which increased to 551 for the three months of June 30, 2009, compared to 521 for the comparable 2008 period.
Six months ended June 30, 2009 compared to the six months ended June 30, 2008
Net interest income from the Global Commercial Bank (GCB) increased by $21.9 million for the six months ended June 30, 2009, primarily due to an increase in net interest income resulting from growth in GCBs loan portfolio, particularly from loans to software, life sciences, and hardware clients, an increase in earnings credit resulting from growth in deposit balances, and an increase in interest income due to decreases in the earnings charge incurred for funded loans. These increases were partially offset by a decrease in interest income from earnings credit received on deposits due primarily to decreases in short-term market interest rates, as well as from a decrease in interest income from loans due to a decrease in our average prime-lending rate to 4.00 percent for the six months ended June 30, 2009, compared to 5.66 percent for the comparable 2008 period.
The provision for loan losses for GCB of $57.7 million for the six months ended June 30, 2009 was primarily attributable to gross loan charge-offs of $23.1 million and specific reserves of $9.2 million related to two loans within our hardware industry portfolio, with the remainder primarily from loans to hardware, software and life sciences portfolios.
Noninterest income decreased by $14.6 million for the six months ended June 30, 2009, primarily due to a decrease in client investment fees of $15.7 million. The decrease in client investment fees was primarily attributable to lower margins earned on certain products owing to historically low rates in the short-term fixed income markets, as well as a decrease in average balances of client investment funds.
Noninterest expense increased by $10.9 million for the six months ended June 30, 2009, primarily
due to an increase in FDIC assessments of $10.1 million and in increase in professional services expense of $2.8 million, partially offset by a decrease in compensation and benefits expense of $4.5 million. The increase in FDIC assessments relates
primarily to a special assessment fee of $5.0 million, mandated for all banks by the FDIC, an increase in average deposit balances, and an increase in fee rates. The increase in professional services expense was primarily due to consulting fees
related to certain infrastructure projects. The decrease in compensation and benefits expense was primarily a result of a decrease in our incentive compensation related expenses, resulting from our actual first and second quarter 2009 results being
below our expectations, partially offset by an increase in salaries and wages expenses, primarily as a result of growth in the number of average FTE employees at GCB, which increased to 556 for the six months of June 30, 2009, compared to 521
Relationship Management
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
Net interest income |
$ | 8,428 | $ | 7,439 | 13.3 | % | $ | 17,315 | $ | 14,847 | 16.6 | % | ||||||||||
(Provision for) recovery of loan losses |
(6,470 | ) | (241 | ) | NM | (7,119 | ) | 214 | NM | |||||||||||||
Noninterest income |
308 | 429 | (28.2 | ) | 611 | 838 | (27.1 | ) | ||||||||||||||
Noninterest expense |
(3,525 | ) | (3,701 | ) | (4.8 | ) | (7,174 | ) | (7,837 | ) | (8.5 | ) | ||||||||||
(Loss) income before income tax expense |
$ | (1,259 | ) | $ | 3,926 | (132.1 | ) | $ | 3,633 | $ | 8,062 | (54.9 | ) | |||||||||
Total average loans |
$ | 965,767 | $ | 882,006 | 9.5 | $ | 977,738 | $ | 858,464 | 13.9 | ||||||||||||
Total average assets |
967,229 | 886,091 | 9.2 | 979,350 | 862,625 | 13.5 | ||||||||||||||||
Total average deposits |
148,296 | 169,598 | (12.6 | ) | 160,411 | 165,145 | (2.9 | ) |
NM- | Not meaningful |
51
Three months ended June 30, 2009 compared to the three months ended June 30, 2008
Net interest income increased by $1.0 million for the three months ended June 30, 2009, primarily due to an increase in net interest income due to decreases in the earnings charge incurred for funded loans as well as from growth in Relationship Managements loan portfolio, particularly from growth in loans to certain high-net-worth individuals. These increases were partially offset by a decrease in interest income from loans due to a decrease in our average prime-lending rate as well as a decrease in interest income from earnings credit received on deposits due to decreases in short-term market interest rates.
The provision for loan losses for Relationship Management of $6.5 million for the three months ended June 30, 2009 was primarily attributable to charge-offs and reserves related to loans to certain high-net-worth individuals.
Six months ended June 30, 2009 compared to the six months ended June 30, 2008
Net interest income increased by $2.5 million for the six months ended June 30, 2009, primarily due to an increase in interest income due to decreases in the earnings charge incurred for funded loans as well as from growth in Relationship Managements loan portfolio, particularly from growth in loans to targeted high-net-worth individuals. These increases were partially offset by a decrease in interest income from loans due to a decrease in our average prime-lending rate as well as a decrease in interest income from earnings credit received on deposits due to decreases in short-term market interest rates.
The provision for loan losses for Relationship Management of $7.1 million for the six months ended June 30, 2009 was primarily attributable to charge-offs and reserves related to loans to certain high-net-worth individuals.
Noninterest expense decreased by $0.7 million for the six months ended June 30, 2009, due to a decrease in compensation and benefits expense of $0.7 million attributable to a decrease in incentive compensation
SVB Capital
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
Net interest (loss) income |
$ | (1 | ) | $ | 17 | (105.9 | )% | $ | (3 | ) | $ | 30 | (110.0 | )% | ||||||||
Noninterest income |
2,359 | 2,997 | (21.3 | ) | 1 | 5,076 | (100.0 | ) | ||||||||||||||
Noninterest expense |
(3,290 | ) | (4,723 | ) | (30.3 | ) | (6,636 | ) | (8,950 | ) | (25.9 | ) | ||||||||||
Loss before income tax expense |
$ | (932 | ) | $ | (1,709 | ) | (45.5 | ) | $ | (6,638 | ) | $ | (3,844 | ) | 72.7 | |||||||
Total average assets |
$ | 92,621 | $ | 51,580 | 79.6 | $ | 89,133 | $ | 44,500 | 100.3 |
SVB Capitals components of noninterest income primarily include net gains and losses on investment securities and fund management fees, all net of noncontrolling interests and carried interest. When we refer to net gains and losses on investment securities in the discussion below, we are referring to net gains and losses from investment securities, net of noncontrolling interests and carried interest.
We experience variability in the performance of SVB Capital from quarter to quarter due to a number of factors, including changes in the values of our funds investments, changes in the amount of distributions and general economic and market conditions. Such variability may lead to volatility in the gains and losses from investment securities and cause our results for a particular period not to be indicative of future performance. The valuation of our consolidated investment funds continues to be affected by a more challenging venture capital environment, a significant slowdown of M&A activities and effectively a halt in IPOs among our portfolio companies in 2008 and first half of 2009. The net losses for the three and six months ended June 30, 2009 were primarily due to lower than expected operating results, lower comparative valuations from other private companies, and declines in the public equity markets, reflective of the current economic slowdown throughout the venture capital/private equity community. As a result, we saw more unrealized losses due to lower valuations in the three and six months ended June 30, 2009, compared to the comparable 2008 periods.
52
Three months ended June 30, 2009 compared to the three months ended June 30, 2008
Noninterest income was $2.4 million for the three months ended June 30, 2009, compared to $3.0 million for the comparable 2008 period. SVB Capitals components of noninterest income primarily include:
|
Fund management fees of $2.5 million and $2.0 million for the three months ended June 30, 2009 and 2008, respectively. The increase in fund management fees was primarily due to the closings of a fund in the SVB Strategic Investors Fund family in the fourth quarter of 2008 and the first quarter of 2009. Typically, a fund of funds is formed through multiple closing transactions in which limited partners enter into investment commitments. |
|
Net losses on investment securities of $0.5 million for the three months ended June 30, 2009, compared to net gains of $1.0 million for the comparable 2008 period. The net losses on investment securities of $0.5 million for the three months ended June 30, 2009 were primarily due to net decreases in the fair value of fund investments. |
Noninterest expense decreased by $1.4 million for the three months ended June 30, 2009, primarily due to a decrease in compensation and benefits expense attributable to incentive compensation related expenses, due to our lower than expected actual second quarter 2009 results.
Six months ended June 30, 2009 compared to the six months ended June 30, 2008
Noninterest income was $1 thousand for the six months ended June 30, 2009, compared to $5.1 million for the comparable 2008 period. SVB Capitals components of noninterest income primarily include:
|
Net losses on investment securities of $5.1 million for the six months ended June 30, 2009, compared to net gains of $1.2 million for the comparable 2008 period. The net losses on investment securities of $5.1 million for the six months ended June 30, 2009 were primarily due to net losses from three of our managed funds of funds due to net decreases of $3.3 million in the fair value of fund investments and a decrease of $1.3 million in carried interest due to a decline in the performance of two of our managed funds of funds. |
|
Fund management fees of $5.2 million and $3.9 million for the six months ended June 30, 2009 and 2008, respectively. The increase in fund management fees was primarily due to the closings of a fund in the SVB Strategic Investors Fund family in the fourth quarter of 2008 and the first quarter of 2009. |
Noninterest expense decreased by $2.3 million for the six months ended June 30, 2009, primarily due to a decrease in compensation and benefits expense attributable to incentive compensation related expenses, due
Other Business Services
Our Other Business Services group includes SVB Analytics and our Sponsored Debt Funds and Strategic Investments.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||||
Net interest (loss) income |
$ | (54 | ) | $ | 9 | NM | % | $ | (80 | ) | $ | 43 | NM | % | ||||||||
Noninterest income |
2,761 | 3,294 | (16.2 | ) | 4,358 | 1,438 | NM | |||||||||||||||
Noninterest expense |
(2,933 | ) | (2,977 | ) | (1.5 | ) | (9,959 | ) | (5,262 | ) | 89.3 | |||||||||||
(Loss) income before income tax expense |
$ | (226 | ) | $ | 326 | (169.3 | ) | $ | (5,681 | ) | $ | (3,781 | ) | 50.3 | ||||||||
Total average assets |
$ | 75,723 | $ | 62,608 | 20.9 | $ | 75,012 | $ | 64,180 | 16.9 |
|
NM- Not meaningful
Included in noninterest income are net gains and losses on investment securities, net of noncontrolling interests and carried interest from our sponsored debt funds and strategic investments components of noninterest income. When we refer to net gains and losses on investment securities in the discussion below, we are referring to net gains and losses from investment securities, net of noncontrolling interests and carried interest.
53
We experience variability in the performance of our sponsored debt funds and strategic investments from quarter to quarter due to a number of factors, including changes in the values of our funds investments, changes in the amount of distributions and general economic and market conditions. Such variability may lead to volatility in the gains and losses from investment securities and cause our results for a particular period not to be indicative of future performance.
SVB Analytics provides equity valuation and equity management services to private companies and venture capital firms. We also offer equity management services, including capitalization data management, through eProsper, Inc., a company which SVB Analytics holds a controlling ownership interest.
Three months ended June 30, 2009 compared to the three months ended June 30, 2008
Noninterest income decreased by $0.5 million, primarily due to lower net gains from our strategic investments.
Six months ended June 30, 2009 compared to the six months ended June 30, 2008
Noninterest income increased by $2.9 million, primarily due to net gains from our sponsored debt fund investments, partially offset by losses due to other-than-temporary impairment of certain strategic venture capital fund investments.
Noninterest expense increased by $4.7 million, primarily due to a non-tax deductible charge of $4.1 million related to impairment of goodwill resulting from changes in our outlook for eProspers future financial performance. Additionally, there was an increase in compensation and benefits expense, primarily attributable to the growth in the number of average FTE employees at SVB Analytics, which increased to 35 for the six months of June 30, 2009, compared to 27 for the comparable 2008 period.
Consolidated Financial Condition
Our total assets were $11.5 billion at June 30, 2009, an increase of $1.5 billion, or 14.5 percent, compared to $10.0 billion at December 31, 2008. The increase was primarily due to significant increases in cash due to the growth in our deposit balances.
Cash and Due from Banks
Cash and due from banks totaled $3.2 billion at June 30, 2009, an increase of $1.4 billion, or 81.4 percent, compared to $1.8 billion at December 31, 2008. The increase was primarily due to the significant increase in our deposit balances from December 31, 2008 to June 30, 2009. As of June 30, 2009 and December 31, 2008, $3.0 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate.
Federal Funds Sold, Securities Purchased Under Agreements to Resell and Other Short-Term Investments
Federal funds sold, securities purchased under agreements to resell and other short-term investments were $462.8 million at June 30, 2009, a decrease of $184.6 million, or 28.5 percent, compared to $647.4 million at December 31, 2008. The decrease was primarily due to cash management strategies.
Investment Securities
Investment securities totaled $2.6 billion at June 30, 2009, an increase of $852.3 million, or 47.7 percent, compared to $1.8 billion at December 31, 2008. The increase was primarily related to purchases of U.S. agency securities and agency-issued collateralized mortgage obligations as part of our overall investment strategy.
Marketable Securities
Marketable securities consist of our available-for-sale fixed income investment portfolio and marketable securities accounted for under investment company fair value accounting.
Our fixed income investment portfolio is managed with the goal of responsibly maximizing portfolio yield over the long-term in a manner consistent with our liquidity, credit diversification, our asset/liability, and risk management strategies. All securities in our fixed income investment portfolio are currently held as available-for-sale. Available-for-sale securities were $2.2 billion at June 30, 2009, an increase of $841.9 million, or 63.9 percent, compared to $1.3 billion at December 31, 2008. The increase was primarily due to a $591.4 million increase in U.S. agency securities and a $273.3 million increase in our agency-issued collateralized mortgage obligations, as part of our overall investment strategy.
The duration of our fixed income investment portfolio decreased to 2.3 years at June 30, 2009, compared to 2.8 years at December 31, 2008. Changes in portfolio duration are impacted by the effect of changing interest rates on mortgage-backed securities and collateralized mortgage obligations as well as changes in the mix of longer versus shorter term to maturity securities.
54
Marketable securities accounted for under investment company accounting represents investments managed by SVB Capital or our consolidated sponsored debt fund that were originally made within our non-marketable securities portfolio and have been converted into publicly-traded shares. Marketable securities were $0.5 million and $1.7 million at June 30, 2009, and December 31, 2008, respectively. The decrease of $1.2 million was primarily due to the sale of certain investments in one of our sponsored debt funds.
Non-Marketable Securities
Non-marketable securities primarily represent investments managed by SVB Capital and Sponsored Funds and Strategic Investments as part of our investment funds management business. Included in our non-marketable securities carried under investment company fair value accounting are amounts that are attributable to noncontrolling interests. We are required under GAAP to consolidate 100% of these investments that we are deemed to control, even though we may own less than 100% of such entities. Non-marketable securities were $478.7 million ($193.6 million net of noncontrolling interests) as of June 30, 2009, an increase of $11.5 million or 2.5 percent, compared to $467.2 million ($169.1 million net of noncontrolling interests) as of December 31, 2008. The increase was primarily attributable to new investments, partially offset by unrealized valuation losses of venture capital/private equity investments.
Loans
Loans, net of unearned income were $4.8 billion at June 30, 2009, a decrease of $662.0 million, or 12.0 percent, compared to $5.5 billion at December 31, 2008. Unearned income was $41.8 million at June 30, 2009, a decrease of $3.6 million, or 7.9 percent, compared to $45.4 million at December 31, 2008. The majority of our loans are commercial in nature. Total gross loans were $4.9 billion at June 30, 2009, a decrease of $665.6 million, or 12.0 percent, compared to $5.6 billion at December 31, 2008. The decrease came primarily from decreases in loans to venture capital/private equity funds for capital calls due to the continuing effects of the downturn in the economic environment causing lower levels of venture capital investments, as well as from a decrease in our technology client portfolio. The breakdown of total gross loans by industry sector is as follows:
Industry Sector | June 30, 2009 | December 31, 2008 | ||||||||||
(Dollars in thousands) |
Amount | Percentage | Amount | Percentage | ||||||||
Technology (1) |
$ | 2,342,165 | 48.0 | % | $ | 2,666,372 | 48.0 | % | ||||
Private Equity |
810,220 | 16.6 | 1,065,424 | 19.2 | ||||||||
Life Sciences (1) |
586,907 | 12.0 | 601,690 | 10.8 | ||||||||
Private Client Services |
490,613 | 10.0 | 523,299 | 9.4 | ||||||||
Premium Winery |
400,694 | 8.2 | 419,916 | 7.6 | ||||||||
All other sectors |
255,441 | 5.2 | 274,935 | 5.0 | ||||||||
Total gross loans |
$ | 4,886,040 | 100.0 | $ | 5,551,636 | 100.0 | ||||||
(1) | Included in the technology and life science niches are loans provided to emerging growth clients, which represent approximately 13 percent of total gross loans at June 30, 2009, compared to 12 percent at December 31, 2008. |
The following table provides a summary of concentration in our loan portfolio by industry sector and size of loan as of June 30, 2009:
(Dollars in thousands) |
June 30, 2009 | |||||||||||||||||
Less than
Five Million |
More than
Five to Ten Million |
More than
Ten to Twenty Million |
More than
Twenty to Thirty Million |
More than
Thirty Million |
Total | |||||||||||||
Technology |
$ | 1,109,742 | $ | 251,290 | $ | 451,599 | $ | 260,362 | $ | 269,172 | $ | 2,342,165 | ||||||
Private Equity |
196,439 | 176,722 | 189,357 | 109,941 | 137,761 | 810,220 | ||||||||||||
Life Sciences |
330,019 | 96,289 | 135,223 | 25,376 | | 586,907 | ||||||||||||
Private Client Services |
281,423 | 99,377 | 10,406 | 24,006 | 75,401 | 490,613 | ||||||||||||
Premium Winery |
176,648 | 96,780 | 127,266 | | | 400,694 | ||||||||||||
All other sectors |
119,894 | 53,194 | 61,353 | 21,000 | | 255,441 | ||||||||||||
Total gross loans |
$ | 2,214,165 | $ | 773,652 | $ | 975,204 | $ | 440,685 | $ | 482,334 | $ | 4,886,040 | ||||||
At June 30, 2009, gross loans totaling $923.0 million, or 18.9 percent of our portfolio, were individually greater than $20 million. These loans represented 28 clients, and of these loans $68.0 million were on nonaccrual status as of June 30, 2009.
55
The following table provides a summary of concentration in our loan portfolio by industry sector and size of loan as of December 31, 2008:
(Dollars in thousands) |
December 31, 2008 | |||||||||||||||||
Less than
Five Million |
More than
Five to Ten Million |
More than
Ten to Twenty Million |
More than
Twenty to Thirty Million |
More than
Thirty Million |
Total | |||||||||||||
Technology |
$ | 1,236,293 | $ | 328,518 | $ | 533,694 | $ | 283,403 | $ | 284,464 | $ | 2,666,372 | ||||||
Private Equity |
186,289 | 222,806 | 304,264 | 115,175 | 236,890 | 1,065,424 | ||||||||||||
Life Sciences |
324,915 | 120,249 | 102,325 | 21,800 | 32,401 | 601,690 | ||||||||||||
Private Client Services |
278,330 | 79,360 | 60,433 | 22,719 | 82,457 | 523,299 | ||||||||||||
Premium Winery |
184,798 | 115,841 | 98,967 | 20,310 | | 419,916 | ||||||||||||
All other sectors |
81,002 | 53,255 | 90,178 | 50,500 | | 274,935 | ||||||||||||
Total gross loans |
$ | 2,291,627 | $ | 920,029 | $ | 1,189,861 | $ | 513,907 | $ | 636,212 | $ | 5,551,636 | ||||||
At December 31, 2008, gross loans totaling $1.2 billion, or 20.7 percent of our portfolio, were individually greater than $20 million. These loans represented 36 clients, and of these loans $66.7 million were on nonaccrual status as of December 31, 2008.
Credit Quality, Allowance for Loan Losses and Reserve for Unfunded Credit Commitments
Nonperforming assets consist of loans past due 90 days or more, loans on nonaccrual status and foreclosed property classified as Other Real Estate Owned (OREO). The table below sets forth certain data and ratios between nonperforming loans, nonperforming assets and the allowance for loan losses:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | ||||||
Nonperforming loans: |
||||||||
Loans past due 90 days or more still accruing interest |
$ | 55 | $ | 2,330 | ||||
Nonaccrual loans |
111,406 | 84,919 | ||||||
Total nonperforming loans |
111,461 | 87,249 | ||||||
OREO |
450 | 1,250 | ||||||
Total nonperforming assets |
$ | 111,911 | $ | 88,499 | ||||
Nonperforming loans as a percentage of total gross loans |
2.28 | % | 1.57 | % | ||||
Nonperforming assets as a percentage of total assets |
0.98 | 0.88 | ||||||
Allowance for loan losses |
$ | 110,473 | $ | 107,396 | ||||
As a percentage of total gross loans |
2.26 | % | 1.93 | % | ||||
As a percentage of nonperforming loans |
99.11 | 123.09 | ||||||
Reserve for unfunded credit commitments (1) |
$ | 11,266 | $ | 14,698 |
(1) | The Reserve for unfunded credit commitments is included as a component of Other Liabilities. See (Reduction of) Provision for Unfunded Credit Commitments above for a discussion of the changes to the reserve. |
Nonaccrual Loans
All nonaccrual loans represent impaired loans. Average impaired loans for the three months ended June 30, 2009 and 2008 were $105.8 million and $11.0 million, respectively, and average impaired loans for the six months ended June 30, 2009 and 2008, were $100.4 million and $9.6 million, respectively. If these loans had not been impaired, $2.0 million and $0.1 million in interest income would have been recorded for the three months ended June 30, 2009 and 2008, respectively, and $3.7 million and $0.3 million in interest income would have been recorded for the six months ended June 30, 2009 and 2008.
56
Accrued Interest Receivable and Other Assets
A summary of accrued interest receivable and other assets at June 30, 2009 and December 31, 2008 is as follows:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 * | % Change | ||||||
Derivative assets, gross (1) |
$ | 119,565 | $ | 174,990 | (31.7 | )% | |||
Deferred tax assets and income tax receivable, net |
89,372 | 65,372 | 36.7 | ||||||
FHLB and FRB stock |
35,778 | 35,651 | 0.4 | ||||||
Accrued interest receivable |
38,575 | 35,218 | 9.5 | ||||||
Foreign exchange spot contract assets, gross |
36,535 | 21,333 | 71.3 | ||||||
OREO |
450 | 1,250 | (64.0 | ) | |||||
Other |
33,886 | 28,103 | 20.6 | ||||||
Total accrued interest receivable and other assets |
$ | 354,161 | $ | 361,917 | (2.1 | ) | |||
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation for more details. Amounts for December 31, 2008 have been revised. |
(1) | See Derivatives, Net section below. |
Deferred Tax Assets and Income Tax Receivable, Net
Our deferred tax assets balance was $62.8 million at June 30, 2009, compared to $63.2 million at December 31, 2008. We pay quarterly estimated taxes to the Internal Revenue Service and certain state and foreign taxing authorities. At June 30, 2009 and December 31, 2008, we had $26.6 million and $2.1 million, respectively, as income taxes receivable from these authorities. The increase was primarily due to tax payments for 2008 and 2009 made to the IRS and various state taxing authorities.
Derivatives, Net
Derivative instruments are recorded as a component of other assets and other liabilities on the balance sheet. The following table provides a summary of derivative assets (liabilities), net at June 30, 2009 and December 31, 2008:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | %Change | ||||||||
Assets (liabilities): |
|||||||||||
Equity warrant assets |
$ | 47,704 | $ | 43,659 | 9.3 | % | |||||
Interest rate swapsassets |
49,739 | 94,142 | (47.2 | ) | |||||||
Foreign exchange forward and option contractsassets |
22,122 | 37,189 | (40.5 | ) | |||||||
Foreign exchange forward and option contractsliabilities |
(22,854 | ) | (32,632 | ) | (30.0 | ) | |||||
Total derivatives, net |
$ | 96,711 | $ | 142,358 | (32.1 | ) | |||||
Equity Warrant Assets
As part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of equity warrant assets in certain client companies. At June 30, 2009, we held warrants in 1,285 companies, compared to 1,307 companies at December 31, 2008. The change in fair value of equity warrant assets is recorded in gains on derivatives instruments, net, in noninterest income (loss), a component of consolidated net income. The following table provides a summary of transactions and valuation changes for equity warrant assets for the three and six months ended June 30, 2009 and 2008, respectively:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Balance, beginning of period |
$ | 44,933 | $ | 32,906 | $ | 43,659 | $ | 31,317 | ||||||||
New equity warrant assets |
1,692 | 2,589 | 3,766 | 4,763 | ||||||||||||
Non-cash increases in fair value |
2,502 | 1,862 | 3,035 | 3,258 | ||||||||||||
Exercised equity warrant assets |
(147 | ) | (406 | ) | (369 | ) | (1,930 | ) | ||||||||
Terminated equity warrant assets |
(1,276 | ) | (488 | ) | (2,387 | ) | (945 | ) | ||||||||
Balance, end of period |
$ | 47,704 | $ | 36,463 | $ | 47,704 | $ | 36,463 | ||||||||
Interest Rate Swaps
For information on our interest rate swaps, see Note 9-Derivative Financial Instruments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
57
Foreign Exchange Forward and Foreign Currency Option Contracts
For information on our foreign exchange forward and foreign currency option contracts, see Note 9-Derivative Financial Instruments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
At June 30, 2009 and December 31, 2008, the aggregate notional amounts of foreign exchange forward and foreign currency option contracts totaled $807.3 million and $824.4 million, respectively. We had no net exposure for foreign exchange forward and foreign currency option contracts at June 30, 2009, compared to net exposure risk of $4.6 million at December 31, 2008.
Deposits
Deposits were $9.0 billion at June 30, 2009, an increase of $1.5 billion, or 20.4 percent, compared to $7.5 billion at December 31, 2008. The increase in our deposit balance was primarily due to increases in our noninterest-bearing demand deposits of $1.1 billion and our interest-bearing sweep deposits of $496.3 million. The overall increase in our deposits was due to the following factors: (i) our decision to utilize our own on-balance sheet sweep product, and discontinue offering a third-party, off-balance sheet product in late 2008; and (ii) the desire for some clients to benefit from the security provided by FDIC insurance in noninterest-bearing accounts. At June 30, 2009, 38.3 percent of our total deposits were interest-bearing deposits, compared to 40.9 percent at December 31, 2008.
At June 30, 2009, the aggregate balance of time deposit accounts individually exceeding $100,000 totaled $303.2 million, compared to $326.8 million at December 31, 2008. At June 30, 2009, substantially all time deposit accounts exceeding $100,000 in balances were scheduled to mature within one year. No material portion of our deposits has been obtained from a single depositor and the loss of any one depositor would not materially affect our business.
Long-Term Debt
At June 30, 2009 and December 31, 2008, we had long-term debt of $909.6 million and $995.4 million, respectively. At June 30, 2009,
long-term debt included FHLB advances, 5.70% senior notes and 6.05% subordinated notes, 2008 Convertible Notes, junior subordinated debentures, 4.99% notes payable related to one of our debt fund investments, and other long-term debt. The decrease
in long-term debt of $85.8 million at June 30, 2009, compared to December 31, 2008, was primarily attributable to the maturity of $50 million in FHLB advances in May 2009, as well as the change in fair value of the interest rate swaps
associated with our senior and subordinated notes. For information on our interest rate swaps, see Note 9-Derivative Financial Instruments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I,
Other Liabilities
A summary of other liabilities at June 30, 2009 and December 31, 2008, respectively, is as follows:
(Dollars in thousands) |
June 30, 2009 | December 31, 2008 | % Change | ||||||
Foreign exchange spot contract liabilities, gross |
$ | 83,125 | $ | 34,008 | 144.4 | % | |||
Derivative liabilities, gross (1) |
22,854 | 32,632 | (30.0 | ) | |||||
Accrued compensation |
24,954 | 35,957 | (30.6 | ) | |||||
Reserve for unfunded credit commitments |
11,266 | 14,698 | (23.4 | ) | |||||
Other |
62,914 | 58,258 | 8.0 | ||||||
Total other liabilities |
$ | 205,113 | $ | 175,553 | 16.8 | ||||
(1) | See Derivatives, Net section above. |
Accrued Compensation
Accrued compensation include amounts for our Incentive Compensation Plans, vacation, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan and ESOP. The decrease of $11.0 million was primarily due to 2008 annual incentive compensation payouts received by employees in March 2009, partially offset by additional compensation accruals made in 2009.
Reserve for Unfunded Credit Commitments
The level of reserve for unfunded credit commitments is determined following a methodology that parallels that used for the allowance for loan losses. We recognized a reduction of provision for unfunded credit commitments of $3.4 million for the six months ended June 30, 2009, which was reflective of a decrease in the balance of our total unfunded credit commitments due to expirations and reductions in credit lines to certain clients, as well as lower utilization of commitments by borrowers. Total unfunded credit commitments were $5.0 billion at June 30, 2009, compared to $5.6 billion at December 31, 2008.
58
Other
Other liabilities increased by $4.7 million to $62.9 million at June 30, 2009, compared to $58.3 million at December 31, 2008. The increase was primarily attributable to an increase in accrued FDIC assessments due to a special assessment fee of $5.0 million, mandated for all banks.
Noncontrolling Interests
Noncontrolling interests totaled $306.0 million and $320.4 million at June 30, 2009 and December 31, 2008, respectively. The decrease of $14.4 million was primarily due to net loss attributable to noncontrolling interests of $43.0 million for the six months ended June 30, 2009, primarily from our managed funds of funds and managed co-investment funds, partially offset by equity transactions, which included $29.8 million of contributed capital, primarily from investors in four of our managed funds for the purpose of investing in limited partnerships and portfolio companies.
Capital Resources
Our management seeks to maintain adequate capital to support anticipated asset growth, operating needs and credit risks, and to ensure that SVB Financial and the Bank are in compliance with all regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Our management engages in a regular capital planning process in an effort to make effective use of the capital available to us. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and unexpected credit losses, investment activity, potential product and business expansions and strategic or infrastructure investments.
In December 2008, we participated in the Capital Purchase Program (CPP), under which we received $235 million in exchange for issuing shares of Series B Preferred Stock and a warrant to purchase common stock to the Treasury. For more information refer to our Managements Discussion and Analysis of Financial Condition and Results of Operations Capital Resources under Part II, Item 7 of our 2008 Form 10-K.
Common Stock and Preferred Stock
For information on our common stock and preferred stock, see Note 2- Stockholders Equity and Earnings Per Share of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
SVBFG Stockholders Equity
SVBFG stockholders equity totaled $1.0 billion at both June 30, 2009 and December 31, 2008. SVB Financial has not paid a cash dividend on our common stock since 1992 and, as of June 30, 2009, there were no plans for any payment of dividends. Under the terms of our participation in the CPP, we may not, without the prior consent of the United States Treasury, pay any dividend on our common stock prior to the earlier of December 12, 2011 and the date on which the outstanding shares of Series B Preferred Stock have been redeemed in whole or have been transferred to a third party. As of June 30, 2009, we had no plans to pay, or to seek consent from the Treasury to pay, cash dividends on our common stock.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Both SVB Financial and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board. Under these capital guidelines, the minimum total risk-based capital ratio and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%, respectively, for a well-capitalized depository institution. Under the same capital adequacy guidelines, a well-capitalized depository institution must maintain a minimum Tier 1 leverage ratio of 5.0%.
The Federal Reserve has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio.
The Federal Reserve Board has also established minimum capital leverage ratio guidelines for state member banks. The ratio is determined using Tier 1 capital divided by quarterly average total assets. The guidelines require a minimum of 5.0% for a well-capitalized depository institution.
59
Both the capital ratios of SVB Financial and the Bank were in excess of regulatory guidelines for a well-capitalized depository institution at June 30, 2009 and December 31, 2008. Capital ratios for SVB Financial and the Bank are set forth below:
June 30, 2009 | December 31, 2008 | |||||
SVB Financial: |
||||||
Total risk-based capital ratio |
18.46 | % | 17.58 | % | ||
Tier 1 risk-based capital ratio |
13.89 | 12.51 | ||||
Tier 1 leverage ratio |
9.88 | 13.00 | ||||
Tangible common equity to tangible assets ratio (1) |
6.94 | 7.64 | ||||
Tangible common equity to risk-weighted assets ratio (1) |
10.54 | 9.31 | ||||
Bank: |
||||||
Total risk-based capital ratio |
16.06 | % | 13.79 | % | ||
Tier 1 risk-based capital ratio |
11.40 | 8.66 | ||||
Tier 1 leverage ratio |
8.17 | 9.20 | ||||
Tangible common equity to tangible assets ratio (1) |
7.82 | 7.38 | ||||
Tangible common equity to risk-weighted assets ratio (1) |
11.48 | 8.58 |
(1) | See below for a reconciliation of non-GAAP tangible common equity and tangible assets. |
The increase in the total risk-based and Tier 1 capital ratios for SVB Financial at June 30, 2009, compared to December 31, 2008, was primarily due to a shift in the mix of assets to a lower overall risk-weighting driven by a significant increase in funds held at the Federal Reserve. For the same period, larger increases in the total risk-based and Tier 1 capital ratios for the Bank were affected by the same change in the mix of risk-weighted assets, in addition to an increase in earnings from operations and a capital contribution from the Bank Holding Company. For both SVB Financial and the Bank, decreases in the Tier 1 leverage ratio were reflective of our decision to utilize our own on-balance sheet sweep product, and discontinue offering a third-party, off-balance sheet product in late 2008, which resulted in substantial increases in cash balances and deposit liabilities resulting in significant growth in the balance sheet.
The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP:
* | Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- Basis of Presentation of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report for further details. Amounts for December 31, 2008 have been revised. |
60
At SVB Financial, the tangible common equity to tangible assets ratio decreased due to an increase in tangible assets on a consolidated basis. At the Bank, the tangible common equity to tangible asset ratio increased due to the capital contribution from SVB Financial, partially offset by an increase in tangible assets. For both SVB Financial and the Bank, the increase in tangible common equity to risk-weighted asset ratios is reflective of the higher concentration of lower risk-weighted assets.
Off-Balance Sheet Arrangements
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. For details of our commitments to extend credit, and commercial and standby letters of credit, please refer to Note 12-Off-Balance Sheet Arrangements, Guarantees, and Other Commitments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Commitments to Invest in Private Equity Funds
We make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately held companies. Commitments to invest in these funds are generally made for a ten-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years. The actual timing of future cash requirements to fund such commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate.
Included in our commitments to invest in venture capital and private equity funds are commitments to fund 354 venture capital and private equity funds where our ownership interest is less than 5% of the voting interests of each such fund. At June 30, 2009, our unfunded commitments for these funds totaled $334.1 million. Of the $334.1 million of unfunded commitments, approximately $290.6 million represents the remainder of the investment commitments made by SVB Financial on behalf of certain new managed funds of funds that we plan to form (New Fund Commitments). As of June 30, 2009, $48.5 million of the New Fund Commitments has already been funded and is included as a part of our investment securities portfolio in private equity investments (cost method accounting). The New Fund Commitments are intended to be transferred to, and become the financial obligations of, these new funds once they are formed with the binding commitments of outside investors. Upon formation of such funds and transfer of these investments to the new funds, these investments are expected to be accounted for on an investment company fair value basis and any underlying gains or losses would be recognized in earnings according to the ownership interests of all participants in the fund, including SVB Financial. While the actual cash requirements of these New Fund Commitments are dependent on various factors, we currently expect capital calls of approximately $18.1 million during the remainder of 2009.
For further details on our commitments to invest in private equity funds, refer to Note 12-Off-Balance Sheet Arrangements, Guarantees, and Other Commitments of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial needs, including paying creditors, meeting depositors needs, accommodating loan demand and growth, fund investments, repurchasing shares and other capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our Asset/Liability Committee (ALCO), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines, subject to the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs.
Historically, we have attracted a stable, low-cost deposit base, which has been our primary source of liquidity. From time to time, depending on market conditions, prevailing interest rates or our introduction of additional interest-bearing deposit products, our deposit levels and cost of deposits may fluctuate. We introduced an interest-bearing money market deposit product for early stage clients and an interest-bearing sweep deposit product in 2007. Our sweep deposit balance increased by $496.3 billion to $1.8 billion at June 30, 2009, compared to $1.3 billion at December 31, 2008. Additionally, we grew our noninterest-bearing demand deposits by $1.2 billion to $5.6 billion at June 30, 2009, compared to $4.4 billion as of December 31, 2008. The overall increase in our deposits was primarily due to the following factors: (i) our decision to utilize our own on-balance sheet sweep product, and discontinue offering a third-party, off-balance sheet product in late 2008; and (ii) the desire for some clients to benefit from the security provided by FDIC insurance in noninterest-bearing accounts. We continue to expand on opportunities to increase our liquidity and take steps to carefully manage our liquidity.
61
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, investment securities maturing within six months, investment securities eligible and available for financing or pledging purposes with a maturity in excess of six months and anticipated near-term cash flows from investments.
On a stand-alone basis, SVB Financials primary liquidity channels include dividends from the Bank, its investment portfolio assets, cash and cash equivalents, and its ability to raise debt and equity capital. The ability of the Bank to pay dividends is subject to certain regulations described in BusinessSupervision and RegulationRestriction on Dividends under Part I, Item 1 of our 2008 Form 10-K.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for the six months ended June 30, 2009 and 2008, respectively. Please refer to our Interim Statements of Cash Flows for the six months ended June 30, 2009, and 2008 under Part I, Item 1 of this report.
Six months ended June 30, | ||||||||
(Dollars in thousands) |
2009 | 2008 | ||||||
Average cash and due from banks |
$ | 259,482 | $ | 262,773 | ||||
Average federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
3,099,153 | 536,392 | ||||||
Average cash and cash equivalents |
$ | 3,358,635 | $ | 799,165 | ||||
Percentage of total average assets |
31.4 | % | 11.5 | % | ||||
Net cash provided by operating activities |
$ | 86,088 | $ | 47,849 | ||||
Net cash used for investing activities |
(287,231 | ) | (696,363 | ) | ||||
Net cash provided by financing activities |
1,473,788 | 594,120 | ||||||
Net increase (decrease) in cash and cash equivalents |
$ | 1,272,645 | $ | (54,394 | ) | |||
Average cash and cash equivalents increased by $2.6 billion to $3.4 billion for the six months ended June 30, 2009, compared to $799.2 million for the comparable 2008 period, primarily due to our decision to utilize our own on-balance sheet sweep product, and discontinue offering a third-party, off-balance sheet product in late 2008, which resulted in substantial increases in cash balances.
Cash provided by operating activities was $86.1 million for the six months ended June 30, 2009, which included net loss of $39.9 million. Significant adjustments for noncash items that increased cash provided by operating activities included $64.9 million related to the provision for loan losses, $41.8 million in net losses on investment securities, net changes of $33.9 million in foreign exchange spot contracts, $15.4 million of depreciation and amortization, and tax benefit of original issue discount of $10.7 million. Significant adjustments for noncash items that decreased cash provided by operating activities included net changes of $24.5 million in income tax receivable, an $11.0 million decrease in accrued compensation, and net changes of $6.6 million in deferred income tax benefit.
Cash used for investing activities was $287.2 million for the six months ended June 30, 2009. Net cash outflows included purchases of available-for-sale securities of $1.1 billion and purchases of non-marketable securities of $61.2 million. Net cash inflows included a net decrease in loans of $597.3 million and proceeds from the sales, maturities, and pay downs of available-for-sale securities of $244.3 million.
Cash provided by financing activities was $1.5 billion for the six months ended June 30, 2009. Net cash inflows included increases in deposits of $1.5 billion and net capital contributions from noncontrolling interests of $28.6 million. Net cash outflows included repayments of other long-term debt of $50.9 million and a decrease in short-term borrowings of $30.8 million.
Cash and cash equivalents at June 30, 2009 were $3.7 billion, compared to $628.8 million at June 30, 2008.
62
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk Management
Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads and changes in the shape and level of the yield curve. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant and no separate quantitative information concerning them is presented herein.
Interest rate risk is managed by the Asset/Liability Committee (ALCO), which is a management committee. ALCO reviews sensitivities of assets and liabilities to changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and current market conditions. Adherence to relevant policies, which are approved by the Finance Committee of our Board of Directors, is monitored on an ongoing basis and decisions related to the management of interest rate exposure are made, as appropriate.
Management of interest rate risk is carried out primarily through strategies involving our investment securities and funding portfolios. In addition, our policies permit off-balance sheet derivative instruments to manage interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the market value of portfolio equity and net interest income under a variety of interest rate scenarios, balance sheet forecasts and proposed strategies. The simulation model provides a dynamic assessment of interest rate sensitivity embedded in our balance sheet. We also use traditional gap analysis to provide a simple indicator of interest rate risk. Gap analysis provides only a static view of interest rate sensitivity at a point in time, while the simulation model measures the potential volatility in forecasted results relating to changes in market interest rates over time. We review our interest rate risk position at a minimum, on a quarterly basis.
Market Value of Portfolio Equity and Net Interest Income
One application of the aforementioned simulation model involves measurement of the impact of market interest rate changes on our market value of portfolio equity (MVPE). MVPE is defined as the market value of assets, less the market value of liabilities, adjusted for any off-balance sheet items. A second application of the simulation model measures the impact of market interest rate changes on our net interest income (NII).
The following table presents our MVPE and NII sensitivity exposure at June 30, 2009 and December 31, 2008, related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points, respectively.
Estimated
MVPE |
Estimated Increase/
(Decrease) In MVPE |
Estimated
NII |
Estimated Increase/
(Decrease) In NII |
|||||||||||||||||
Change in interest rates (basis points) |
Amount | Percent | Amount | Percent | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
June 30, 2009: |
||||||||||||||||||||
+200 |
$ | 1,720,730 | $ | 155,345 | 9.9 | % | $ | 535,661 | $ | 90,009 | 20.2 | % | ||||||||
+100 |
1,644,891 | 79,506 | 5.1 | 481,999 | 36,347 | 8.2 | ||||||||||||||
- |
1,565,385 | | | 445,652 | | | ||||||||||||||
-100 |
1,542,545 | (22,840 | ) | (1.5 | ) | 434,801 | (10,851 | ) | (2.4 | ) | ||||||||||
-200 |
1,540,600 | (24,785 | ) | (1.6 | ) | 430,745 | (14,907 | ) | (3.3 | ) | ||||||||||
December 31, 2008: |
||||||||||||||||||||
+200 |
$ | 1,623,746 | $ | 119,253 | 7.9 | % | $ | 467,955 | $ | 57,865 | 14.1 | % | ||||||||
+100 |
1,554,708 | 50,215 | 3.3 | 425,970 | 15,880 | 3.9 | ||||||||||||||
- |
1,504,493 | | | 410,090 | | | ||||||||||||||
-100 |
1,437,606 | (66,887 | ) | (4.4 | ) | 403,890 | (6,200 | ) | (1.5 | ) | ||||||||||
-200 |
1,457,086 | (47,407 | ) | (3.2 | ) | 401,074 | (9,016 | ) | (2.2 | ) |
The estimated MVPE in the preceding table is based on a discounted cash flow analysis using market interest rates provided by independent broker/dealers and other publicly available sources that we deem reliable. These estimates are highly assumption-dependent and will change regularly as our asset/liability structure changes, as interest rate environments evolve, and as we change our assumptions in response to relevant circumstances. These calculations do not reflect changes we may make to reduce our MVPE exposure in response to a change in market interest rates. We expect to continue to manage our interest rate risk utilizing on and off-balance sheet strategies, as appropriate.
63
As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk and basis risk which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the preceding table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting MVPE and NII estimates are not intended to represent, and should not be construed to represent the underlying value.
Our base case MVPE at June 30, 2009 increased from December 31, 2008 by $60.9 million primarily due to the increased value of our noninterest-bearing deposit base which was attributed principally to the steepening of the yield curve. MVPE sensitivity declined in simulated downward interest rate movements due to the historically low level of interest rates. Our simulation model embeds floors in our interest rate scenarios which prevent model benchmark rates from resulting in negative rates. Given the low level of interest rates, these floors contributed to the lower sensitivity in the down 100 and 200 basis point scenarios. MVPE sensitivity increased in both the 100 and 200 basis point simulated upward interest rate movements primarily due to the large increase in rate sensitive cash equivalents that earn interest at the Federal Funds target rate and maintains their value as rates increase. However, our decision not to lower interest rates in conjunction with the 75 basis point Federal Funds rate decrease on December 16, 2008, contributed to the lower sensitivity percentage in the up 100 basis point scenario. Current modeling assumptions maintain the SVB prime lending rate at its existing level until the Prime Index has been adjusted upward by a minimum of 75 basis points, however, these assumptions may change in future periods.
Our expected 12-month NII at June 30, 2009 also increased from December 31, 2008 by $35.6 million due primarily to our balance sheet growing by $1.5 billion. The growth is principally attributed to large increases in our noninterest-bearing deposit accounts contributing to a similar growth in our rate sensitive cash equivalents. NII sensitivity increased in both the simulated downward interest rate movements and as well as upward rate scenarios. The change in sensitivity is due to the factors mentioned above for the MVPE (predominantly modeled interest rate floors) as well as the changes in our balance sheet mix, our deposit repricing assumptions, and the steepening of the yield curve. The steepening of the yield curve included the long end of the LIBOR/Swap curve (greater than five years) increasing by over 100 basis points on average, while the short end of the LIBOR/Swap curve (less than one year) decreased by over 50 basis points on average. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our overall sensitivity.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of our most recently completed fiscal quarter, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in managements evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
Please refer to Note 15-Legal Matters of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 of this report.
64
ITEM 1A. | RISK FACTORS |
Our business faces significant risks, including current market environment, credit, market/liquidity, operational, legal/regulatory and strategic/reputation risks. The factors described below may not be the only risks we face and are not intended to serve as a comprehensive listing or be applicable only to the category of risk under which they are disclosed. The risks described below are generally applicable to more than one of the following categories of risks. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following factors actually occurs, our business, financial condition and/or results of operations could suffer.
There are no material changes from the risk factors set forth in our 2008 Form 10-K.
Risks Relating to Current Market Environment
The continuation or worsening of current market and economic conditions may adversely affect our industry, business, results of operations and ability to access capital.
The United States is currently in a serious economic downturn, as are economies around the world. Financial markets are volatile, business and consumer spending has declined, and overall business activities have slowed, including a slowdown over the past several quarters in mergers, acquisitions and initial public offerings of companiesevents upon which the venture capital and private equity community relies to exit their investments. If current market and economic conditions persist, our clients will continue to be adversely impacted, as well as our investment returns, valuations of companies and overall levels of venture capital and private equity investments, which may have a material and adverse affect on our business, financial condition and results of operations. A worsening of these conditions could likely exacerbate the adverse affect on us.
As a result of current economic conditions, the capital and credit markets have been experiencing extreme volatility and disruption. SVB Financial depends on access to equity and debt markets as one of its primary sources to raise capital. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Recent and future legislation and regulatory initiatives to address current market and economic conditions may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy.
Recent and future legislative and regulatory initiatives to address current market and economic conditions, such as the EESA or the ARRA, may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy. EESA was enacted in October 2008 to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Treasury and banking regulators have implemented, and likely will continue to implement, various programs under this legislation to address capital and liquidity issues in the banking system, including TARP, the CPP, President Obamas Financial Stability Plan announced in February 2009, and the ARRA. There can be no assurance as to the actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy. Any failure of these initiatives to help stabilize or improve the financial markets and the economy, and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.
Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.
Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA, EESA, and the Federal Deposit Insurance Corporations (FDIC) Temporary Liquidity Guaranty Program (TLGP), subject participants to additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, may have a material and adverse affect on our business, financial condition, and results of operations.
Credit Risks
If our clients fail to perform under their loans, our business, profitability and financial condition could be adversely affected.
As a lender, we face the risk that our client borrowers will fail to pay their loans when due. If borrower defaults cause large aggregate losses, it could have a material adverse effect on our business, profitability and financial condition. We reserve for such losses by establishing an allowance for loan losses, the increase of which results in a charge to our earnings as a provision for loan losses. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are dependent to a great extent on our subjective assessment based upon our experience and judgment. Actual losses are
65
difficult to forecast, especially if such losses stem from factors beyond our historical experience or are otherwise inconsistent or out of pattern with regards to our credit quality assessments. There can be no assurance that our allowance for loan losses will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability and financial condition.
Because of the credit profile of our loan portfolio, our levels of nonperforming assets and charge-offs can be volatile. We may need to make material provisions for loan losses in any period, which could reduce net income or increase net losses in that period.
Our loan portfolio has a credit profile different from that of most other banking companies. In addition, the credit profile of our clients varies across our loan portfolio, based on the nature of the lending we do for different market segments. In our portfolios for emerging-technology, early-stage and mid-stage companies, many of our loans are made to companies with modest or negative cash flows and no established record of profitable operations. Repayment of these loans is dependent upon receipt by borrowers of additional equity financing from venture capitalists or others, or in some cases, a successful sale to a third party or a public offering. In recent periods, due to the overall weakening of the economic environment, venture capital financing activity has slowed, and initial public offerings (IPOs) and merger/acquisition (M&A) activities have slowed significantly. If economic conditions worsen or do not improve, such activities may slow down even further. Venture capital firms may provide financing at lower levels, more selectively or on less favorable terms, which may have an adverse affect on our borrowers that are otherwise dependent on such financing to repay their loans to us. Moreover, collateral for many of our loans often includes intellectual property, which is difficult to value and may not be readily salable in the case of default. Because of the intense competition and rapid technological change that characterizes the companies in our technology and life science industry sectors, a borrowers financial position can deteriorate rapidly.
Additionally, we may enter into accounts receivable financing arrangements with our company clients. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business. Such third parties may be unable to meet their financial obligations to our clients, especially in a weakened economic environment.
In our portfolio of venture capital and private equity firm clients, many of our clients have capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These limited partner investors may face liquidity issues or have difficulties meeting their financial commitments, especially during unstable economic times, which may lead to our clients inability to meet their repayment obligations to us.
Additionally, we have been increasing our efforts to lend to corporate technology clients, including some companies with greater levels of debt relative to their equity, and have increased the average size of our loans over time. At June 30, 2009, our gross loan portfolio included a total of $923.0 million, or 18.9 percent, of individual loans greater than $20 million. Increasing our larger loan commitments could increase the impact on us of any single borrower default.
For all of these reasons, our level of nonperforming loans, loan charge-offs and additional allowance for loan losses can be volatile and can vary materially from period to period. Increases in our level of nonperforming loans or loan charge-offs may require us to increase our provision for loan losses in any period, which could reduce our net income or cause net losses in that period. Additionally, such increases in our level of nonperforming loans or loan charge-offs may also have an adverse effect on our credit ratings and market perceptions of us.
The borrowing needs of our clients may be volatile, especially during a challenging economic environment. We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with our unfunded credit commitments, which could have a material effect on our business, profitability, results of operations and reputation.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of our clients, we typically have a substantial amount of total unfunded credit commitments, which is reflected off our balance sheet. At June 30, 2009, we had $5.0 billion in total unfunded credit commitments. Actual borrowing needs of our clients may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from more discerning and selective venture capital/private equity firms. Or, limited partner investors of our venture capital/private equity fund clients facing liquidity or other financing issues may fail to meet their underlying investment commitments, which may impact our clients borrowing needs. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our clients, may have a material adverse effect on our business, profitability, results of operations and reputation.
Additionally, we establish a reserve for unfunded credit commitments to reserve for losses associated with our unfunded credit commitments. The level of the reserve for unfunded credit commitments is determined by following a methodology similar to that used to establish our allowance for loan losses in our funded loan portfolio. The reserve is based on credit commitments outstanding,
66
credit quality of the loan commitments, and managements estimates and judgment, and is susceptible to significant changes. There can be no assurance that our reserve for unfunded credit commitments will be adequate to provide for actual losses associated with our unfunded credit commitments. An increase in the reserve in any period may result in a charge to our earnings as a provision for unfunded credit commitments, which could reduce our net income or increase net losses in that period.
Market/Liquidity Risks
Our current level of interest rate spread may decline in the future. Any material reduction in our interest rate spread, or a sustained period of low market interest rates, could have a material adverse effect on our business, profitability or financial condition.
A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. We fund assets using deposits and other borrowings. While we are increasingly offering more interest-bearing deposit products, a majority of our deposit balances are from our non-interest bearing products. Our interest-earning assets include outstanding loans extended to our clients and securities held in our investment portfolio. Overall, the interest rates we pay on our interest-bearing liabilities and receive on our interest-earning assets could be affected by a variety of factors, including changes in market interest rates, competition, a change over time in the mix of loans comprising our loan portfolio or deposits compromising our deposit portfolio and the mix of loans, investment securities, deposits and other liabilities on our balance sheet.
Changes in market interest rates, such as the Federal Funds rate, generally impact our interest rate spread. While changes in interest rates do not produce equivalent changes in the revenues earned from our interest-earning assets and the expenses associated with our interest-bearing liabilities because of the composition of our balance sheet, increases in market interest rates will likely cause our interest rate spread to increase. Conversely, if interest rates decline, our interest rate spread will likely decline. Recent decreases in market interest rates have caused our interest rate spread to decline significantly, which reduces our net income. Sustained low levels of market interest rates will likely continue to put pressure on our profitability. Unexpected interest rate declines may also adversely affect our business forecasts and expectations. Interest rates are highly sensitive to many factors beyond our control, such as inflation, recession, global economic disruptions, unemployment and the fiscal and monetary policies of the federal government and its agencies.
Any material reduction in our interest rate spread could have a material adverse effect on our business, profitability and financial condition.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, equity/debt offerings and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a reduction in our credit ratings, an increase in costs of capital in financial capital markets, a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, or a decrease in depositor or investor confidence in us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.
Additionally, our credit ratings are important to our liquidity and our business. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, and limit our access to the capital markets. Moreover, a reduction could increase the interest rates we pay on deposits, or adversely affect perceptions about our creditworthiness or our overall reputation.
Equity warrant asset, venture capital and private equity funds and direct equity investment portfolio gains or losses depend upon the performance of the portfolio investments and the general condition of the public equity markets, which are uncertain and may vary materially by period.
We obtain rights to acquire stock in the form of equity warrant assets in certain clients as part of negotiated credit facilities and for other services. We also make investments in venture capital and private equity funds and direct investments in companies. The fair value of these warrants and investments are reflected in our financial statements and adjusted on a quarterly basis. Fair value changes are generally recorded as unrealized gains or losses through consolidated net income. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of our realization of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for initial public offerings, levels of merger and acquisition activity, legal and contractual restrictions on our ability to sell, and the perceived and actual
67
performance and future value of portfolio companies. Because of the inherent variability of these financial instruments and the markets in which they are made, the fair market value of these financial instruments might increase or decrease materially, and the net proceeds realized upon disposition might be less than the then-current recorded fair market value.
We cannot predict future realized or unrealized gains or losses, and any such gains or losses are likely to vary materially from period to period. Additionally, the value of our equity warrant asset portfolio depends on the number of warrants we obtain, and in future periods, we may not be able to continue to obtain such equity warrant assets to the same extent we historically have achieved.
Public equity offerings and mergers and acquisitions involving our clients or a slowdown in venture capital investment levels may reduce the borrowing needs of our clients, which could adversely affect our business, profitability and financial condition.
While an active market for public equity offerings and mergers and acquisitions generally has positive implications for our business, one negative consequence is that our clients may pay off or reduce their loans with us if they complete a public equity offering, are acquired by or merge with another entity or otherwise receive a significant equity investment. The current economic conditions reflect a slowdown in such transactions, however if the levels of such transactions were to increase, our total outstanding loans may decline. Moreover, our capital call lines of credit are typically utilized by our venture capital fund clients to make investments prior to receipt of capital called from their respective limited partners. A slowdown in overall venture capital investment levels may reduce the need for our clients to borrow from our capital call lines of credit. Any significant reduction in the outstanding amounts of our loans or lines of credit could have a material adverse effect on our business, profitability and financial condition.
Failure to raise additional funds from third-party investors for our funds managed by SVB Capital may require us to use capital to fund commitments to other funds, which may have a material adverse affect on our business, financial condition and reputation.
From time to time, we form new investment funds through our funds management division, SVB Capital. These funds include funds that invest in other venture capital and private equity funds (which we refer to as funds of funds) and portfolio companies (which we refer to as direct equity funds). Our managed funds are typically structured as limited partnerships, heavily funded by third party limited partners and ultimately managed by us through our SVB Capital division. We typically will also make a commitment of significant capital to each of these funds as a limited partner.
Prior to forming a new fund of funds, SVB Financial has made and may make investment commitments intended for the new fund, in order to show potential investors the types of funds in which the new fund will invest. Until these investments are transferred to the new fund, which typically will occur upon the acceptance of binding commitments from third-party limited partners (the closing), these investments are obligations of SVB Financial. If we fail to attract sufficient capital from third-party investors to conduct the closing of a fund of funds, we may be required to permanently allocate capital to these investments when we otherwise had intended them to be temporary obligations. If, under such circumstances, we decide to sell these investments or fail to meet our obligations, we may lose some or all of the capital that has already been deployed and may be subject to legal claims. Any unexpected permanent allocation of capital toward these investments, loss of capital contributed to these investments or legal claims against us could have a material adverse affect on our business and financial condition, as well as our reputation.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. Many of these transactions expose us to credit and market risk that may cause our counterparty or client to default. In addition, we are exposed to market risk when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.
Operational Risks
If we fail to retain our key employees or recruit new employees, our growth and profitability could be adversely affected.
We rely on key personnel, including a substantial number of employees who have technical expertise in their subject matter area and/or a strong network of relationships with individuals and institutions in the markets we serve. If we were to have less success in recruiting and retaining these employees than our competitors, for reasons including regulatory restrictions on compensation practices (such as those under EESA as amended by the ARRA) or the availability of more attractive opportunities elsewhere, our growth and profitability could be adversely affected.
The manner in which we structure our employee compensation could adversely affect our results of operations and cash flows, as well as our ability to attract, recruit and retain key employees.
68
In May 2006, in an effort to align our equity grant rate to that of other financial institutions similar to us, we committed to restrict the total number of shares of our common stock issued under stock options, restricted stock awards, restricted stock unit awards, stock bonus awards and any other equity awards granted during a fiscal year as a percentage of the total number of shares outstanding on a prospective basis. In light of this restriction, we may in the future consider taking other actions to modify employee compensation structures, such as granting cash compensation or other cash-settled forms of equity compensation, which may result in an additional charge to our earnings.
How we structure our equity compensation may also have an adverse affect on our ability to attract, recruit and retain key employees. Our decision in May 2006 to reduce equity awards to be granted on a prospective basis, and any other similar changes limiting our equity awards that we may adopt in the future, could negatively impact our hiring and retention strategies. Moreover, current economic conditions have reduced our share price, causing existing employee options and equity awards to have exercise prices higherin some cases, meaningfully higherthan our current share price. These factors could adversely affect our ability to attract, recruit and retain certain key employees.
The occurrence of breaches of our information security could have a material adverse effect on our business, financial condition and results of operations.
Information pertaining to us and our clients are maintained, and transactions are executed, on our internal networks and internet-based systems, such as our online banking system. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and to maintain our clients confidence. Increases in criminal activity levels, advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Although we have developed systems and processes that are designed to detect and prevent security breaches and periodically test our security, failure to mitigate breaches of security could result in losses to us or our clients, result in a loss of business and/or clients, cause us to incur additional expenses, affect our ability to grow our online services or other businesses, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
More generally, publicized information security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to provide financial services over the Internet would be severely impeded if clients became unwilling to transmit confidential information online. As a result, our business, financial condition and results of operations could be adversely affected.
We face risks associated with the ability of our information technology systems and our people and processes to support our operations and future growth effectively.
In order to serve our target clients effectively, we have developed a comprehensive array of banking and other products and services. In order to support these products and services, we have developed and purchased or licensed information technology and other systems and processes. As our business continues to grow, we will continue to invest in and enhance these systems, and our people and processes. These investments and enhancements may affect our future profitability and overall effectiveness. From time to time, we may change, consolidate, replace, add or upgrade existing systems or processes, which if not implemented properly to allow for an effective transition, may have an adverse affect on our operations. Or, we may outsource certain operational functions to consultants or other third parties to enhance our overall efficiencies, which if not performed properly, could also have an adverse affect on us. There can be no assurance that we will be able to effectively maintain or improve our systems and processes, or utilize outsourced talent, to meet our business needs efficiently. Any failure of such could adversely affect our operations, financial condition, results of operations, future growth and reputation.
Business disruptions and interruptions due to natural disasters and other external events beyond our control can adversely affect our business, financial condition and results of operations.
Our operations can be subject to natural disasters and other external events beyond our control, such as earthquakes, fires, severe weather, public health issues, power failures, telecommunication loss, major accidents, terrorist attacks, acts of war, and other natural and man-made events. Our corporate headquarters and a portion of our critical business offices are located in California near major earthquake faults. Such events of disaster, whether natural or attributable to human beings, could cause severe destruction, disruption or interruption to our operations or property. Financial institutions, such as us, generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business could suffer serious harm. In addition, depending on the nature and duration of the disruption or interruption, we might be vulnerable to fraud, additional expense or other losses, or to a loss of business and/or clients. We are in the process of implementing our business continuity and disaster recovery program, which is a multi-year effort. We began
69
implementing the program during 2005, but it has not yet been completed. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.
Additionally, natural disasters and external events could affect the business and operations of our clients, which could impair their ability to pay their loans or fees when due, impair the value of collateral securing their loans, cause our clients to reduce their deposits with us, or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on our business, financial condition and results of operations.
We face reputation and business risks due to our interactions with business partners, service providers and other third parties.
We rely on third parties, both in the United States and internationally in countries such as India, in a variety of ways, including to provide key components of our business infrastructure or to further our business objectives. These third parties may provide services to us and our clients or serve as partners in business activities. We rely on these third parties to fulfill their obligations to us, to accurately inform us of relevant information and to conduct their activities professionally and in a manner that reflects positively on us. Any failure of our business partners, service providers or other third parties to meet their commitments to us or to perform in accordance with our expectations could harm our business and operations, financial performance, strategic growth or reputation.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, under our accounts receivable financing arrangements, we rely on information, such as invoices, contracts and other supporting documentation, provided by our clients and their account debtors to determine the amount of credit to extend. Similarly, in deciding whether to extend credit, we may rely upon our customers representations that their financial statements conform to U.S. generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.
Our accounting policies and methods are key to how we report our financial condition and results of operations. They may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect managements judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative.
Changes in accounting standards could materially impact our financial statements.
From time to time, FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, or apply an existing standard differently, also retroactively, in each case resulting in our restating prior period financial statements.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.
If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from NASDAQ. This could have an adverse effect on our business, financial condition and results of operations, including our stock price, and could potentially subject us to litigation.
70
Legal/Regulatory Risks
We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business.
SVB Financial Group, including the Bank, is extensively regulated under federal and state laws and regulations governing financial institutions, including those imposed by the Federal Reserve or the DFI. Federal and state laws and regulations govern, limit or otherwise affect the activities in which we may engage and may affect our ability to expand our business over time. In addition, a change in the applicable statutes, regulations or regulatory policy could have a material effect on our business, including limiting the types of financial services and products we may offer or increasing the ability of nonbanks to offer competing financial services and products. These laws and regulations also require financial institutions, including SVB Financial and the Bank, to maintain certain minimum levels of capital, which may affect our ability to use our capital for other business purposes. In addition, increased regulatory requirements, whether due to the adoption of new laws and regulations, changes in existing laws and regulations, or more expansive or aggressive interpretations of existing laws and regulations, may have a material adverse effect on our business, financial condition and profitability.
If we were to violate international, federal or state laws or regulations governing financial institutions, we could be subject to disciplinary action that could have a material adverse effect on our business, financial condition, profitability and reputation.
International, federal and state banking regulators possess broad powers to take supervisory or enforcement action with respect to financial institutions. Other regulatory bodies, including the SEC, NASDAQ, the Financial Industry Regulatory Authority (FINRA) and state securities regulators, regulate broker-dealers, including our subsidiary, SVB Securities. If SVB Financial Group were to violate, even if unintentionally or inadvertently, the laws governing public companies, financial institutions and broker-dealers, the regulatory authorities could take various actions against us, depending on the severity of the violation, such as revoking necessary licenses or authorizations, imposing censures, civil money penalties or fines, issuing cease and desist or other supervisory orders, and suspending or expelling from the securities business a firm, its officers or employees. Supervisory actions could result in higher capital requirements, higher insurance premiums and limitations on the activities of SVB Financial Group. These remedies and supervisory actions could have a material adverse effect on our business, financial condition, profitability and reputation.
SVB Financial relies on dividends from its subsidiaries for most of its cash revenues.
SVB Financial is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its cash revenues from dividends from its subsidiaries, primarily the Bank. These dividends are the principal source of funds to pay operating costs, borrowings, if any, and dividends, should SVB Financial elect to pay any. Various federal and state laws and regulations limit the amount of dividends that our bank and certain of our nonbank subsidiaries may pay to SVB Financial. Also, SVB Financials right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is subject to the prior claims of the subsidiarys creditors.
Strategic/Reputation Risks
Adverse changes in domestic or global economic conditions, especially in our industry niches, could have a material adverse effect on our business, growth and profitability.
Overall deterioration in domestic or global economic conditions, especially in the technology, life science, venture capital/private equity and premium wine industry niches or overall financial capital markets, may materially adversely affect our business, growth and profitability. A global, U.S. or significant regional economic slowdown or recession, such as the current economic downturn, could harm us by adversely affecting our clients and prospective clients access to capital to fund their businesses, their ability to sustain and grow their businesses, the level of funds they have available to maintain deposits, their demand for loans, their ability to repay loans and otherwise.
Concentration of risk increases the potential for significant losses.
Concentration of risk increases the potential for significant losses in our business. Our clients are concentrated by industry niches: technology, life science, venture capital/private equity and premium wine. Many of our client companies are concentrated by certain stages within their life cycles, such as early-stage or mid-stage, and many of these companies are venture capital-backed. Our loan concentrations are derived from our borrowers engaging in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers to be similarly impacted by economic or other conditions. Any adverse effect on any of our areas of concentration could have a material impact on our business or results of operations. Due to our concentrations, we may suffer losses even when economic and market conditions are generally favorable for our competitors.
71
Decreases in the amount of equity capital available to our portfolio companies could adversely affect our business, growth and profitability.
Our core strategy is focused on providing banking products and services to companies, including in particular to emerging technology stage to mid-stage companies, that receive financial support from sophisticated investors, including venture capital or private equity firms, angels, and corporate investors. We derive a meaningful share of our deposits from these companies and provide them with loans as well as other banking products and services. In some cases, our lending credit decision is based on our analysis of the likelihood that our venture capital or angel-backed client will receive additional rounds of equity capital from investors. If the amount of capital available to such companies decreases, it is likely that the number of new clients and investor financial support to our existing borrowers could decrease, which could have an adverse effect on our business, profitability and growth prospects.
Among the factors that have affected and could in the future affect the amount of capital available to our portfolio companies are the receptivity of the capital markets, IPOs or mergers and acquisitions of companies within our technology and life science industry sectors, the availability and return on alternative investments and general economic conditions in the technology, life science and venture capital/private equity industries. Reduced capital markets valuations could reduce the amount of capital available to our client companies, including companies within our technology and life science industry sectors.
Because our business and strategy are largely based on this venture capital/private equity financing framework focused on our particular client niches, any material changes in the framework, including adverse trends in investment or fundraising levels, may have a materially adverse affect on our business, strategy and overall profitability.
We face competitive pressures that could adversely affect our business, profitability, financial condition and future growth.
Other banks and specialty and diversified financial services companies and debt funds, many of which are larger than we are, offer lending, leasing, other financial products and advisory services to our client base. In addition, we compete with hedge funds and private equity funds. In some cases, our competitors focus their marketing on our industry sectors and seek to increase their lending and other financial relationships with technology companies or special industries such as wineries. In other cases, our competitors may offer a broader range of financial products to our clients. When new competitors seek to enter one of our markets, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and credit terms prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. Our pricing and credit terms could deteriorate if we act to meet these competitive challenges, which could adversely affect our business, profitability, financial condition and future growth. Similarly, competitive pressures could adversely affect the business, profitability, financial condition and future growth of our non-banking services, including our access to capital and attractive investment opportunities for our funds business and our ability to secure attractive engagements in our investment banking business.
Our ability to maintain or increase our market share depends on our ability to meet the needs of existing and future clients.
Our success depends, in part, upon our ability to adapt our products and services to evolving industry standards and to meet the needs of existing and potential future clients. A failure to achieve market acceptance of any new products we introduce, a failure to introduce products that the market may demand, or the costs associated with developing, introducing and providing new products and services could have an adverse effect on our business, profitability and growth prospects.
We face risks in connection with our strategic undertakings.
If appropriate opportunities present themselves, we may engage in strategic activities, which could include acquisitions, joint ventures, partnerships, investments or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
In order to finance future strategic undertakings, we might obtain additional equity or debt financing. Such financing might not be available on terms favorable to us, or at all. If obtained, equity financing could be dilutive and the incurrence of debt and contingent liabilities could have a material adverse effect on our business, results of operations and financial condition.
Our ability to execute strategic activities successfully will depend on a variety of factors. These factors likely will vary based on the nature of the activity but may include our success in integrating the operations, services, products, personnel and systems of an acquired company into our business, operating effectively with any partner with whom we elect to do business, retaining key employees, achieving anticipated synergies, meeting managements expectations and otherwise realizing the undertakings anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or managements attention from ongoing business operations and may subject us to additional regulatory scrutiny. If we do not successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations.
72
We face risks associated with international operations.
One component of our strategy is to expand internationally. To date, we have opened offices in China, India, Israel and the United Kingdom. We plan to expand our operations in those locations and may expand beyond these countries. Our efforts to expand our business internationally carry with them certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations. In addition, there are certain risks inherent in doing business on an international basis, including, among others, legal, regulatory and tax requirements and restrictions, uncertainties regarding liability, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, differing technology standards or customer requirements, political and economic risks and financial risks, including currency and payment risks. These risks could adversely affect the success of our international operations and could have a material adverse effect on our overall business, results of operation and financial condition. In addition, we face risks that our employees may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act and foreign laws and regulations, which could have a material adverse effect on us.
Our business reputation is important and any damage to it could have a material adverse effect on our business.
Our reputation is very important to sustain our business, as we rely on our relationships with our current, former and potential clients and stockholders, the venture capital and private equity communities and the industries that we serve. Any damage to our reputation, whether arising from regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, or our conduct of our business or otherwise could have a material adverse effect on our business.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The 2009 Annual Meeting of Stockholders was held on May 12, 2009. There were 32,932,567 shares of common stock outstanding and entitled to vote at the meeting. A total of 30,770,276 shares of common stock were represented at the meeting in person or by proxy, representing 93.4 percent of the shares outstanding and entitled to vote at the meeting.
At the meeting, stockholders:
(1) re-elected all 12 of SVB Financials incumbent directors to serve for the ensuing year and until their successors are elected,
(2) ratified the selection of KPMG LLP as SVB Financials independent registered public accounting firm for its fiscal year ending December 31, 2009; and
(3) approved an advisory (non-binding) proposal concerning the Companys executive compensation.
73
The voting results of the above matters were as follows:
(1) | Election of directors: |
Election of Directors |
In Favor | Withheld | ||
Eric A. Benhamou |
30,209,276 | 561,000 | ||
David M. Clapper |
30,570,834 | 199,442 | ||
Roger F. Dunbar |
30,570,817 | 199,459 | ||
Joel P. Friedman |
30,564,957 | 205,319 | ||
G. Felda Hardymon |
30,568,222 | 202,054 | ||
Alex W. Pete Hart |
30,389,529 | 380,747 | ||
C. Richard Kramlich |
30,450,665 | 319,611 | ||
Lata Krishnan |
29,817,983 | 952,293 | ||
James R. Porter |
30,125,151 | 645,125 | ||
Michaela K. Rodeno |
30,269,213 | 501,063 | ||
Kenneth P. Wilcox |
30,487,331 | 282,945 | ||
Kyung H. Yoon |
29,633,876 | 1,136,400 |
(2) | Ratification of selection of KPMG LLP as SVB Financials independent registered public accounting firm of its fiscal year ending December 31, 2009: |
In Favor |
Against | Abstain | ||
30,360,205 | 363,498 | 46,572 |
(3) | Approval of an advisory (non-binding) proposal concerning the Companys executive compensation: |
In Favor |
Against | Abstain | ||
29,578,391 | 1,098,352 | 93,532 |
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
See Index to Exhibits at end of report.
74
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SVB Financial Group | ||||
Date: August 7, 2009 |
/s/ MICHAEL DESCHENEAUX |
|||
Michael Descheneaux Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
75
Exhibit
|
Exhibit Description |
Incorporated by Reference |
Filed
|
|||||||||
Form |
File No. |
Exhibit |
Filing Date |
|||||||||
3.1 |
Restated Certificate of Incorporation | 8-K | 000-15637 | 3.1 | May 31, 2005 | |||||||
3.2 |
Amended and Restated Bylaws | 8-K | 000-15637 | 3.2 | January 29, 2007 | |||||||
3.3 |
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock | 8-K | 000-15637 | 3.3 | December 8, 2008 | |||||||
3.4 |
Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series B | 8-K | 000-15637 | 3.4 | December 15, 2008 | |||||||
4.1 |
Indenture dated as of May 20, 2003 between SVB Financial and Wells Fargo Bank Minnesota, National Association | S-3 | 333-107994 | 4.1 | August 14, 2003 | |||||||
4.2 |
Form of Note | S-3 | 333-107994 | 4.1 | August 14, 2003 | |||||||
4.3 |
Registration Rights Agreement dated as of May 20, 2003, between SVB Financial and the initial purchasers named therein | S-3 | 333-107994 | 4.3 | August 14, 2003 | |||||||
4.4 |
Junior Subordinated Indenture, dated as of October 30, 2003 between SVB Financial and Wilmington Trust Company, as trustee | 8-K | 000-15637 | 4.12 | November 19, 2003 | |||||||
4.5 |
7.0% Junior Subordinated Deferrable Interest Debenture due October 15, 2033 of SVB Financial | 8-K | 000-15637 | 4.13 | November 19, 2003 | |||||||
4.6 |
Amended and Restated Trust Agreement, dated as of October 30, 2003, by and among SVB Financial as depositor, Wilmington Trust Company as property trustee, Wilmington Trust Company as Delaware trustee, and the Administrative Trustees named therein | 8-K | 000-15637 | 4.14 | November 19, 2003 | |||||||
4.7 |
Certificate Evidencing 7% Cumulative Trust Preferred Securities of SVB Capital II, dated October 30, 2003 | 8-K | 000-15637 | 4.15 | November 19, 2003 | |||||||
4.8 |
Guarantee Agreement, dated October 30, 2003, between SVB Financial and Wilmington Trust Company, as trustee | 8-K | 000-15637 | 4.16 | November 19, 2003 | |||||||
4.9 |
Agreement as to Expenses and Liabilities, dated as of October 30, 2003, between SVB Financial and SVB Capital II | 8-K | 000-15637 | 4.17 | November 19, 2003 | |||||||
4.10 |
Certificate Evidencing 7% Common Securities of SVB Capital II, dated October 30, 2003 | 8-K | 000-15637 | 4.18 | November 19, 2003 | |||||||
4.11 |
Officers Certificate and Company Order, dated October 30, 2003, relating to the 7.0% Junior Subordinated Deferrable Interest Debentures due October 15, 2033 | 8-K | 000-15637 | 4.19 | November 19, 2003 | |||||||
4.12 |
Amended and Restated Preferred Stock Rights Agreement, dated as of January 29, 2004, between SVB Financial and Wells Fargo Bank Minnesota, N.A. | 8-A12G/A | 000-15637 | 4.20 | February 27, 2004 | |||||||
4.13 |
Amendment No. 1 to Amended & Restated Preferred Stock Rights Agreement, dated as of August 2, 2004, by and between SVB Financial and Wells Fargo Bank, N.A. | 8-A12G/A | 000-15637 | 4.13 | August 3, 2004 | |||||||
4.14 |
Amendment No. 2 to Amended & Restated Preferred Stock Rights Agreement, dated as of January 29, 2008, by and between SVB Financial and Wells Fargo Bank, N.A. | 8-A/A | 000-15637 | 4.14 | January 29, 2008 | |||||||
4.15 |
Amendment No. 3 to Amended and Restated Preferred Stock Rights Agreement, dated as of April 30, 2008, by and between SVB Financial and Wells Fargo Bank, N.A | 8-A/A | 000-15637 | 4.20 | April 30, 2008 | |||||||
4.16 |
Indenture for 3.875% Convertible Senior Notes Due 2011, dated as of April 7, 2008, by and between Wells Fargo Bank, N.A., as Trustee, and SVB Financial | 8-K | 000-15637 | 4.1 | April 7, 2008 |
76
Exhibit
|
Exhibit Description |
Incorporated by Reference |
Filed
|
|||||||||
Form |
File No. |
Exhibit |
Filing Date |
|||||||||
4.17 |
Letter Agreement re Call Option Transaction, dated as of April 1, 2008, by and between SVB Financial and JPMorgan Chase Bank, National Association. | 8-K | 000-15637 | 4.2 | April 7, 2008 | |||||||
4.18 |
Letter Agreement re Call Option Transaction, dated as of April 1, 2008, by and between SVB Financial and Bank of America, N.A. | 8-K | 000-15637 | 4.3 | April 7, 2008 | |||||||
4.19 |
Letter Agreement re Warrants, dated as of April 1, 2008, by and between SVB Financial and JPMorgan Chase Bank, National Association. | 8-K | 000-15637 | 4.4 | April 7, 2008 | |||||||
4.20 |
Letter Agreement re Warrants, dated as of April 1, 2008, by and between SVB Financial and Bank of America, N.A. | 8-K | 000-15637 | 4.5 | April 7, 2008 | |||||||
4.21 |
Warrant, dated December 12, 2008 to purchase shares of Common Stock of SVB Financial Group | 8-K | 000-15637 | 4.21 | December 15, 2008 | |||||||
*10.16 |
Form of Incentive Stock Option Agreement under 2006 Equity Incentive Plan | X | ||||||||||
*10.17 |
Form of Nonqualified Stock Option Agreement under 2006 Equity Incentive Plan | X | ||||||||||
*10.18 |
Form of Restricted Stock Unit Agreement for Executives under 2006 Equity Incentive Plan | X | ||||||||||
*10.19 |
Form of Restricted Stock Unit Agreement for Employees under 2006 Equity Incentive Plan | X | ||||||||||
*10.20 |
Form of Restricted Stock Award Agreement under 2006 Equity Incentive Plan | X | ||||||||||
*10.23 |
Form of Restricted Stock Unit Agreement for Director under 2006 Equity Incentive Plan | X | ||||||||||
*10.30 |
Global Amendment to Benefit Plans to comply with EESA in Connection with CPP Participation | X | ||||||||||
*10.31 |
Letter Agreement re Salary Increases, dated as of May 11, 2009 by and between SVB Financial and Michael Descheneaux, Chief Financial Officer, SVB Financial and David Webb, Chief Operations Officer, SVB Financial. | 8-K | 000-15637 | 10.31 | May 14, 2009 | |||||||
*10.32 |
Form of Stock Appreciation Right Agreement under 2006 Equity Incentive Plan | X | ||||||||||
*10.33 |
Form of Restricted Stock Unit Agreement for Cash Settlement for Employee under 2006 Equity Incentive Plan | X | ||||||||||
*10.34 |
Form of Restricted Stock Unit Agreement for Cash Settlement for Directors under 2006 Equity Incentive Plan | X | ||||||||||
31.1 |
Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer | X | ||||||||||
31.2 |
Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer | X | ||||||||||
32.1 |
Section 1350 Certifications | ** |
* | Denotes management contract or any compensatory plan, contract or arrangement. |
** | Furnished herewith |
77
EXHIBIT 10.16
Notice of Grant of Stock Options and Award Agreement |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Option Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Grant Type: | ||||
Date of Grant: | ||||
Option Price per Share: | ||||
Total Option Price: | ||||
Expiration Date: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an Incentive Stock Option to buy Shares of SVB Financial Group (the Company) stock at the Option Price listed in the Grant Agreement above (the Option).
Shares in each period will become fully vested on the dates shown in the Vesting Schedule, subject to the Participant continuing to be a Service Provider through each such date.
By your acceptance and the Companys signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name |
Date |
SVB FINANCIAL GROUP
INCENTIVE STOCK OPTION AWARD AGREEMENT
SVB Financial Group (the Company), pursuant to its 2006 Equity Incentive Plan (the Plan), has granted to Participant an Option to purchase shares of the Common Stock of the Company (Shares). This Option is intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code).
The grant hereunder is in connection with and in furtherance of the Companys compensatory benefit plan for participation of the Companys Employees (including Officers), Directors or Consultants. Defined terms not explicitly defined in this Award Agreement shall have the same definitions as in the Plan or in the Notice of Grant of Stock Options (Notice of Grant), to which this Award Agreement is attached.
The details of your Option are as follows:
1. T OTAL N UMBER O F S HARES S UBJECT T O T HIS O PTION . The total number of Shares subject to this Option is set forth in the Notice of Grant.
2. V ESTING . Subject to the limitations contained herein, the Shares will vest (become exercisable) as set forth in the Notice of Grant until either (i) you cease to be a Service Provider for any reason, or (ii) this Option becomes fully vested.
3. O PTION P RICE A ND M ETHOD O F P AYMENT .
(a) Option Price. The Option Price per Share of this Option is the price set forth in the Notice of Grant, such price being not less than one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant of this Option.
(b) Method of Payment. Payment of the Option Price per Share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by Applicable Laws, to make payment of the Option Price under one of the following alternatives:
(i) Payment of the Option Price per Share in cash (including check) at the time of exercise;
(ii) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned Shares, held for the period required to avoid a charge to the Companys reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise;
(iii) Consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
(iv) Payment by a combination of the methods of payment permitted by Section 3(b)(i), (ii), and (iii) above.
4. W HOLE S HARES . This Option may only be exercised for whole Shares.
-2-
5. S ECURITIES L AW C OMPLIANCE . Notwithstanding anything to the contrary contained herein, this Option may not be exercised unless the Shares issuable upon exercise of this Option are then registered under the Securities Act of 1933 (the Securities Act) or, if such Shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act.
6. T ERM . The term of this Option commences on the Date of Grant and expires on the Expiration Date, unless this Option expires sooner as set forth below or in the Plan. In no event may this Option be exercised on or after the Expiration Date. This Option shall terminate prior to the Expiration Date as follows: three (3) months after your termination as a Service Provider unless one of the following circumstances exists:
(a) Your termination as a Service Provider is due to your Disability. This Option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination. You should be aware that if your Disability is not considered a permanent and total disability within the meaning of Section 422(c)(6) of the Code, and you exercise this Option more than three (3) months following the date of your termination of service, your exercise will be treated for tax purposes as the exercise of a nonstatutory stock option instead of an incentive stock option.
(b) Your termination as a Service Provider is due to your death. This Option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months after your death.
(c) Your termination as a Service Provider is due to Cause (as defined in the Plan). This Option will then expire on the date of such termination.
(d) If during any part of such three (3)-month period you may not exercise your Option solely because of the condition set forth in Section 5 above, then your Option will not expire until the earlier of the Expiration Date set forth above or until this Option shall have been exercisable for an aggregate period of three (3) months after your termination as a Service Provider.
(e) If your exercise of the Option within three (3) months after your termination as a Service Provider of the Company or of an Affiliate would result in liability under Section 16(b) of the Securities Exchange Act of 1934, then your Option will expire on the earlier of (i) the Expiration Date set forth above, or (ii) the tenth (10th) day after the last date upon which exercise would result in such liability.
However, this Option may be exercised following your termination as a Service Provider only as to that number of Shares as to which it was exercisable on the date of termination under the provisions of Section 2 of this Option.
In order to obtain the federal income tax advantages associated with an incentive stock option, the Code requires that at all times beginning on the date of grant of the Option and ending on the day three (3) months before the date of the Options exercise, you must be an employee of the Company or any Parent or Subsidiary of the Company, except in the event of your death or Disability. The Company may provide for continued vesting or extended exercisability of your Option under certain circumstances for your benefit, but cannot guarantee that your Option will necessarily be treated as an incentive stock option if you provide services to the Company or any Parent or Subsidiary of the Company as a Consultant or exercise your Option more than three (3) months after the date your employment with the Company or any Parent or Subsidiary of the Company terminates.
-3-
7. E XERCISE .
(a) This Option is exercisable by (i) delivery of an exercise notice, in the form and manner determined by the Administrator, or (ii) following an electronic or other exercise procedure prescribed by the Administrator, which in either case shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. Participant shall provide payment of any applicable tax withholding arising in connection with such exercise. This Option shall be deemed to be exercised upon receipt by the Company of a fully executed exercise notice or completion of such exercise procedure, as the Administrator may determine in its sole discretion, accompanied by any applicable tax withholding.
(b) By exercising this Option you agree that:
(i) as a precondition to the completion of any exercise of this Option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this Option; (2) the lapse of any substantial risk of forfeiture to which the Shares are subject at the time of exercise; or (3) the disposition of Shares acquired upon such exercise; and
(ii) you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of this Option that occurs within two (2) years after the date of this Option grant or within one (1) year after such Shares are transferred upon exercise of this Option.
8. C ODE S ECTION 409A. Under Code Section 409A, an Option that vests after December 31, 2004 (or that vested on or prior to such date but which was materially modified after October 3, 2004) that was granted with a per Share exercise price that is determined by the Internal Revenue Service (the IRS) to be less than the Fair Market Value of a Share on the date of grant (a discount option) may be considered deferred compensation. An Option that is a discount option may result in (i) income recognition by Participant prior to the exercise of the Option, (ii) an additional twenty percent (20%) federal income tax, and (iii) potential penalty and interest charges. The discount option may also result in additional state income, penalty and interest tax to the Participant. Participant acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share exercise price of this Option equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. Participant agrees that if the IRS determines that the Option was granted with a per Share exercise price that was less than the Fair Market Value of a Share on the date of grant, Participant shall be solely responsible for Participants costs related to such a determination.
9. T RANSFERABILITY . This Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this Option.
10. O PTION N OT A S ERVICE C ONTRACT . This Option is not a guarantee of continued service and nothing in this Option shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company, or of the Company to continue your service with the Company. In addition, nothing in this Option shall obligate the Company or any Affiliate, or their respective stockholders, Board of Directors, officers or employees to continue any relationship which you might have as a Service Provider for the Company or Affiliate.
-4-
11. N OTICES . Any notices provided for in this Option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company.
12. G OVERNING P LAN D OCUMENT . This Option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this Option, including without limitation the provisions of Section 6 of the Plan relating to Option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this Option and those of the Plan, the provisions of the Plan shall control.
13. S TOCKHOLDER A PPROVAL . This Option is subject to stockholder approval of the Plan within twelve (12) months of the Plan adoption date. If stockholder approval is not obtained within such twelve (12)-month period, this Option shall immediately terminate in its entirety.
14. E LECTRONIC D ELIVERY . The Company may, in its sole discretion, decide to deliver any documents related to Options awarded under the Plan or future Options that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
15. A UTHORIZATION TO R ELEASE AND T RANSFER N ECESSARY P ERSONAL I NFORMATION . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Options or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Options under the Plan or with whom Shares acquired pursuant to the vesting of the Options. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Options, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
-5-
Notice of Exercise
SVB Financial Group
Attn: Investor Relations HG100
3003 Tasman Drive
Santa Clara, CA 95054
I, , elect to exercise the following SVB Financial Group stock option(s):
Grant
|
Grant
Date: |
Type of
Option: |
Number of
Shares to be Exercised: |
Exercise Price
Per Share: |
Aggregate
Exercise Price: |
|||||||
ISO or NQ | $ | $ | ||||||||||
ISO or NQ | ||||||||||||
ISO or NQ | ||||||||||||
$ | ||||||||||||
TYPE OF EXERCISE:
¨ CASH(1) | ¨ | CASHLESS (Sale of underlying shares of option to pay exercise price) | ¨ | STOCK(1)(2) (Use already-held shares to pay exercise price) | ||||||
¨ | Sell shares | ¨ Sell all shares listed above | Attach Share Attestation Form |
BROKER INFORMATION ( if applicable ):
Firm: |
|
DTC # |
|
Account # |
|
|||||
Contact Person: |
|
Phone: |
|
Fax: |
|
¨ | I authorize my broker to pay SVB Financial Group the aggregate exercise price. For non-qualified (NQ) shares, I also authorize my broker to pay Silicon Valley Bank for the applicable taxes owed. |
DELIVERY INSTRUCTIONS:
¨ Mail certificate to my home address. |
¨ Deliver electronically to my Broker. |
I will (i) provide any additional documents you require pursuant to the terms of the Award Agreement, (ii) pay any withholding taxes resulting from exercise of a NQ stock option, and (iii) notify you in writing within 15 days after any disposition of shares issued under an incentive stock option (ISO) that occurs within 2 years after the grant date or 1 year after the exercise date.
Very truly yours, | ||||||
SS#: |
|
|
||||
Signed | ||||||
Telephone: |
|
|
||||
Address | ||||||
Date: |
|
|
(1) | The Effective Date of cash and stock exercises is the day cash, stock, or Share Attestation Form is received by Investor Relations, unless otherwise notified by Investor Relations as a result of insider trading restrictions. If delivery is made by US Mail (or overnight courier) the Effective Date is the postmark date (or pick-up date). The value of shares remitted for stock transactions is based on the closing stock price on the Effective Date. |
(2) | Attested shares must meet certain requirements. |
-6-
Share Attestation Form
SVB Financial Group
Attn: Investor Relations, HG100
3003 Tasman Drive
Santa Clara, CA 95054
I will use shares of SVB Financial Group (the Company) common stock I already own to pay the exercise price on the stock options identified on the attached Notice of Exercise. I will not deliver the shares. The Company will subtract the number of shares required to pay the exercise price from the underlying shares I am entitled to receive from the stock option and send me the balance.
1. I certify that I own shares of SVB Financial Group common stock (the Attested Shares) which I tender to pay part or all of the stock option exercise price. I hold the Attested Shares ( check one ):
¨ | individually. A photocopy of the stock certificate(s) is attached. |
¨ | jointly as . A photocopy of the stock certificate(s) is attached. |
¨ | in a brokerage account in the name(s) of . A photocopy of a brokerage statement from the preceding two months showing the Company stock is attached. (Note: Irrelevant information related to other investments may be blocked out.) |
2. I certify that ( check all that apply ):
¨ | the Attested Shares are NOT held by a trustee or custodian in an IRA account or any tax deferral plan. |
¨ | I have owned the Attested Shares for AT LEAST SIX MONTHS and did not acquire them in a stock-for-stock transaction during that six months. |
¨ | the Attested Shares were originally acquired through an incentive stock option (ISO) exercise and |
¨ | I have owned shares for AT LEAST ONE YEAR ; or |
¨ | I have owned shares for LESS THAN ONE YEAR (Note: Attesting ISO shares held less than one year triggers a disqualifying disposition of the Attested Shares.) |
¨ | the Attested Shares were purchased through the SVB Financial Group Employee Stock Purchase Plan (ESPP) and: |
¨ | I have owned shares for AT LEAST EIGHTEEN MONTHS; or |
¨ | I have owned shares for LESS THAN EIGHTEEN MONTHS (Note: Attesting ESPP shares held less than eighteen months triggers a disqualifying disposition of the Attested Shares.) |
3. Apply toward the option price:
¨ | the maximum number of whole shares necessary to pay the aggregate exercise price of my option. I agree to settle any fractional share balance with the Company within 2 days of the Effective Date via check. |
¨ | the total number of whole shares represented by this attestation to pay for only part of the exercise price. I agree to settle the remaining balance of the aggregate exercise price by check within 1 day of the Effective Date. |
-7-
Although I will not be required to make actual delivery of the Attested Shares and I will retain full ownership of the Attested Shares, I represent that I (with the consent of the joint owner, if any) have the full power to deliver the Attested Shares to the Company for their benefit.
By signing, any joint owner consents to the exercise of the stock option(s) using Attested Shares and agrees with any representations made above pursuant to the Attested Shares.
|
|
|
Signature of Participant | Signature of any Joint Owner | |
|
|
|
Print Name | Print Name | |
|
||
Effective Date |
-8-
EXHIBIT 10.17
Notice of Grant of Stock Options and Award Agreement |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Option Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Grant Type: | ||||
Date of Grant: | ||||
Option Price per Share: | ||||
Total Option Price: | ||||
Expiration Date: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted a Nonqualified Stock Option to buy Shares of SVB Financial Group (the Company) stock at the Option Price listed in the Grant Agreement above (the Option).
Shares in each period will become fully vested on the dates shown in the Vesting Schedule, subject to the Participant continuing to be a Service Provider through each such date.
By your acceptance and the Companys signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
NONSTATUTORY STOCK OPTION AWARD AGREEMENT
SVB Financial Group (the Company), pursuant to its 2006 Equity Incentive Plan (the Plan), has granted to Participant an Option to purchase shares of the Common Stock of the Company (Shares). This Option is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code).
The grant hereunder is in connection with and in furtherance of the Companys compensatory benefit plan for participation of the Companys Employees (including Officers), Directors or Consultants. Defined terms not explicitly defined in this Award Agreement shall have the same definitions as in the Plan or in the Notice of Grant of Stock Options (Notice of Grant), to which this Award Agreement is attached.
The details of your Option are as follows:
1. T OTAL N UMBER O F S HARES S UBJECT T O T HIS O PTION . The total number of Shares subject to this Option is set forth in the Notice of Grant.
2. V ESTING . Subject to the limitations contained herein, the Shares will vest (become exercisable) as set forth in the Notice of Grant until either (i) you cease to be a Service Provider for any reason, or (ii) this Option becomes fully vested.
3. O PTION P RICE A ND M ETHOD O F P AYMENT .
(a) Option Price. The Option Price per Share is the price set forth in the Notice of Grant, such price being not less than one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant of this Option.
(b) Method of Payment. Payment of the Option Price per Share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by Applicable Laws, to make payment of the Option Price under one of the following alternatives:
(i) Payment of the Option Price per Share in cash (including check) at the time of exercise;
(ii) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned Shares, held for the period required to avoid a charge to the Companys reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise;
(iii) Consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
(iv) Payment by a combination of the methods of payment permitted by Section 3(b)(i), (ii), and (iii) above.
4. W HOLE S HARES . This Option may only be exercised for whole Shares.
-2-
5. S ECURITIES L AW C OMPLIANCE . Notwithstanding anything to the contrary contained herein, this Option may not be exercised unless the Shares issuable upon exercise of this Option are then registered under the Securities Act of 1933 (the Securities Act) or, if such Shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act.
6. T ERM . The term of this Option commences on the Date of Grant and expires on the Expiration Date, unless this Option expires sooner as set forth below or in the Plan. In no event may this Option be exercised on or after the Expiration Date. This Option shall terminate prior to the Expiration Date as follows: three (3) months after your termination as a Service Provider unless one of the following circumstances exists:
(a) Your termination as a Service Provider is due to your Disability. This Option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination.
(b) Your termination as a Service Provider is due to your death. This Option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months after your death.
(c) Your termination as a Service Provider is due to Cause (as defined in the Plan). This Option will then expire on the date of such termination.
(d) If during any part of such three (3)-month period you may not exercise your Option solely because of the condition set forth in Section 5 above, then your Option will not expire until the earlier of the Expiration Date set forth above or until this Option shall have been exercisable for an aggregate period of three (3) months after your termination as a Service Provider.
(e) If your exercise of the Option within three (3) months after your termination as a Service Provider of the Company or of an Affiliate would result in liability under Section 16(b) of the Securities Exchange Act of 1934, then your Option will expire on the earlier of (i) the Expiration Date set forth above, or (ii) the tenth (10th) day after the last date upon which exercise would result in such liability.
However, this Option may be exercised following your termination as a Service Provider only as to that number of Shares as to which it was exercisable on the date of termination under the provisions of Section 2 of this Option.
7. E XERCISE .
(a) This Option is exercisable by (i) delivery of an exercise notice, in the form and manner determined by the Administrator, or (ii) following an electronic or other exercise procedure prescribed by the Administrator, which in either case shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. Participant shall provide payment of any applicable tax withholding arising in connection with such exercise. This Option shall be deemed to be exercised upon receipt by the Company of a fully executed exercise notice or completion of such exercise procedure, as the Administrator may determine in its sole discretion, accompanied by any applicable tax withholding.
(b) By exercising this Option you agree that, as a precondition to the completion of any exercise, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this Option; (2) the lapse of any substantial risk of forfeiture to which the Shares are subject at the time of exercise; or (3) the disposition of Shares acquired upon such exercise. You also agree that the exercise of this
-3-
Option has not been completed and that the Company is under no obligation to issue any Shares to you until such an arrangement is established or the Companys tax withholding obligations are satisfied, as determined by the Company.
8. C ODE S ECTION 409A. Under Code Section 409A, an Option that vests after December 31, 2004 (or that vested on or prior to such date but which was materially modified after October 3, 2004) that was granted with a per Share exercise price that is determined by the Internal Revenue Service (the IRS) to be less than the Fair Market Value of a Share on the date of grant (a discount option) may be considered deferred compensation. An Option that is a discount option may result in (i) income recognition by Participant prior to the exercise of the Option, (ii) an additional twenty percent (20%) federal income tax, and (iii) potential penalty and interest charges. The discount option may also result in additional state income, penalty and interest tax to the Participant. Participant acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share exercise price of this Option equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. Participant agrees that if the IRS determines that the Option was granted with a per Share exercise price that was less than the Fair Market Value of a Share on the date of grant, Participant shall be solely responsible for Participants costs related to such a determination.
9. T RANSFERABILITY .
(a) This Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this Option.
(b) Notwithstanding the foregoing, this Option may be transferred by you, in whole or in part, to:
(i) your spouse, children or grandchildren (including adopted children and stepchildren and step-grandchildren) (the Immediate Family);
(ii) a trust solely for your benefit and your Immediate Family ; or
(iii) a partnership or limited liability company whose only partners or stockholders are you and your Immediate Family ,
(each transferee described in this section is hereafter referred to as a Permitted Transferee), provided that the Committee (or designees thereof) is notified in advance in writing of the terms and conditions of any proposed transfer and the Committee (or designees thereof) determines that the proposed transfer complies with the requirements of the Plan and this Award Agreement. Any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance that does not qualify pursuant to the terms above shall be void and unenforceable against the Company. If such a transfer occurs, the shares issued upon exercise of the transferred Option shall be certificated and shall bear a restrictive legend that notes that the subject shares are not registered with the Securities and Exchange Commission.
(c) The terms of this Award Agreement (including, without limitation, Section 6(b) relating to termination as a result of death) shall apply to your beneficiaries, executors and administrators and your Permitted Transferees (including the beneficiaries, executors and administrators of the Permitted Transferees), including the right to agree to any amendment of the applicable Award Agreement, except that Permitted Transferees shall not transfer any Option other than by will or by the laws of descent and distribution.
-4-
(d) An Option shall be exercised only by you (or your attorney in fact or guardian) (including in the case of a transferred Option, by a Permitted Transferee), or, in the case of your death, by the your executor or administrator (including, in the case of a transferred Option, by the executor or administrator of the Permitted Transferee), and no Shares shall be issued by the Company unless the exercise of an Option is accompanied by sufficient payment, as determined by the Company, to meet its withholding tax obligations on such exercise or by other arrangements satisfactory to the Committee to provide such payment.
10. O PTION N OT A S ERVICE C ONTRACT . This Option is not a guarantee of continued service and nothing in this Option shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company, or of the Company to continue your service with the Company. In addition, nothing in this Option shall obligate the Company or any Affiliate, or their respective stockholders, Board of Directors, officers or employees to continue any relationship which you might have as a Service Provider for the Company or Affiliate.
11. N OTICES . Any notices provided for in this Option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company.
12. G OVERNING P LAN D OCUMENT . This Option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this Option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this Option and those of the Plan, the provisions of the Plan shall control.
13. E LECTRONIC D ELIVERY . The Company may, in its sole discretion, decide to deliver any documents related to Options awarded under the Plan or future Options that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
14. A UTHORIZATION TO R ELEASE AND T RANSFER N ECESSARY P ERSONAL I NFORMATION . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Options or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Options under the Plan or with
-5-
whom Shares acquired pursuant to the vesting of the Options. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Options, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
-6-
Notice of Exercise
SVB Financial Group
Attn: Investor Relations HG100
3003 Tasman Drive
Santa Clara, CA 95054
I, , elect to exercise the following SVB Financial Group stock option(s):
Grant
Number: |
Grant
Date: |
Type of
Option: |
Number of
Shares to be Exercised: |
Exercise Price
Per Share: |
Aggregate
Exercise Price: |
|||||||
ISO or NQ | $ | $ | ||||||||||
ISO or NQ | ||||||||||||
ISO or NQ | ||||||||||||
$ | ||||||||||||
TYPE OF EXERCISE:
¨ CASH(1) | ¨ | CASHLESS (Sale of underlying shares of option to pay exercise price) | ¨ | STOCK(1)(2) (Use already-held shares to pay exercise price) | ||||||
¨ | Sell shares | ¨ Sell all shares listed above | Attach Share Attestation Form |
BROKER INFORMATION (if applicable):
Firm: |
|
DTC # |
|
Account # |
|
|||||
Contact Person: |
|
Phone: |
|
Fax: |
|
¨ | I authorize my broker to pay SVB Financial Group the aggregate exercise price. For non-qualified (NQ) shares, I also authorize my broker to pay Silicon Valley Bank for the applicable taxes owed. |
DELIVERY INSTRUCTIONS:
¨ Mail certificate to my home address. |
¨ Deliver electronically to my Broker. |
I will (i) provide any additional documents you require pursuant to the terms of the Award Agreement, (ii) pay any withholding taxes resulting from exercise of a NQ stock option, and (iii) notify you in writing within 15 days after any disposition of shares issued under an incentive stock option (ISO) that occurs within 2 years after the grant date or 1 year after the exercise date.
Very truly yours, | ||||||
SS#: |
|
|
||||
Signed | ||||||
Telephone: |
|
|
||||
Address | ||||||
Date: |
|
|
(1) | The Effective Date of cash and stock exercises is the day cash, stock, or Share Attestation Form is received by Investor Relations, unless otherwise notified by Investor Relations as a result of insider trading restrictions. If delivery is made by US Mail (or overnight courier) the Effective Date is the postmark date (or pick-up date). The value of shares remitted for stock transactions is based on the closing stock price on the Effective Date. |
(2) | Attested shares must meet certain requirements. |
-7-
Share Attestation Form
SVB Financial Group
Attn: Investor Relations, HG100
3003 Tasman Drive
Santa Clara, CA 95054
I will use shares of SVB Financial Group (the Company) common stock I already own to pay the exercise price on the stock options identified on the attached Notice of Exercise. I will not deliver the shares. The Company will subtract the number of shares required to pay the exercise price from the underlying shares I am entitled to receive from the stock option and send me the balance.
1. I certify that I own shares of SVB Financial Group common stock (the Attested Shares) which I tender to pay part or all of the stock option exercise price. I hold the Attested Shares ( check one ):
¨ | individually. A photocopy of the stock certificate(s) is attached. |
¨ | jointly as . A photocopy of the stock certificate(s) is attached. |
¨ | in a brokerage account in the name(s) of . A photocopy of a brokerage statement from the preceding two months showing the Company stock is attached. (Note: Irrelevant information related to other investments may be blocked out.) |
2. I certify that ( check all that apply ):
¨ | the Attested Shares are NOT held by a trustee or custodian in an IRA account or any tax deferral plan. |
¨ | I have owned the Attested Shares for AT LEAST SIX MONTHS and did not acquire them in a stock-for-stock transaction during that six months. |
¨ | the Attested Shares were originally acquired through an incentive stock option (ISO) exercise and |
¨ | I have owned shares for AT LEAST ONE YEAR ; or |
¨ | I have owned shares for LESS THAN ONE YEAR (Note: Attesting ISO shares held less than one year triggers a disqualifying disposition of the Attested Shares.) |
¨ | the Attested Shares were purchased through the SVB Financial Group Employee Stock Purchase Plan (ESPP) and: |
¨ | I have owned shares for AT LEAST EIGHTEEN MONTHS ; or |
¨ | I have owned shares for LESS THAN EIGHTEEN MONTHS (Note: Attesting ESPP shares held less than eighteen months triggers a disqualifying disposition of the Attested Shares.) |
3. Apply toward the option price:
¨ | the maximum number of whole shares necessary to pay the aggregate exercise price of my option. I agree to settle any fractional share balance with the Company within 2 days of the Effective Date via check. |
¨ | the total number of whole shares represented by this attestation to pay for only part of the exercise price. I agree to settle the remaining balance of the aggregate exercise price by check within 1 day of the Effective Date. |
-8-
Although I will not be required to make actual delivery of the Attested Shares and I will retain full ownership of the Attested Shares, I represent that I (with the consent of the joint owner, if any) have the full power to deliver the Attested Shares to the Company for their benefit.
By signing, any joint owner consents to the exercise of the stock option(s) using Attested Shares and agrees with any representations made above pursuant to the Attested Shares.
|
|
|||
Signature of Participant | Signature of any Joint Owner | |||
|
|
|||
Print Name | Print Name | |||
|
||||
Effective Date |
-9-
EXHIBIT 10.18
Notice of Grant of Restricted Stock Unit Award and Award Agreement (Executives) |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Restricted Stock Units: | ||||
Date of Grant: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an Award of Restricted Stock Units (RSUs) under the SVB Financial Group 2006 Equity Incentive Plan (the Plan).
RSUs in each period will vest in increments on the dates shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date. Unless otherwise specified in the Restricted Stock Unit Election Form (the Election), the Settlement Dates for the RSUs shall be the Vesting Dates.
Unless otherwise defined herein or in the Award Agreement, capitalized terms herein or in the Award Agreement will have the defined meanings ascribed to them in the Plan.
By your acceptance and the Companys signature below, you and the Company agree that these RSUs are granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the this Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK UNIT AWARD AGREEMENT
1. Grant . The Company hereby grants to the Participant under the Plan an Award of the number of RSUs set forth on the first page, subject to all of the terms and conditions in this Award Agreement and the Plan.
2. Companys Obligation to Pay . Each RSU represents the right to receive a share of Common Stock (Share). Unless and until the RSUs will have vested in the manner set forth in Sections 3 and 4, the Participant will have no right to payment of any such RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3. Vesting Schedule . Subject to Section 4, the RSUs awarded by this Award Agreement will vest in the Participant according to the vesting schedule set forth on the attached Restricted Stock Unit Agreement, subject to the Participant continuing to be a Service Provider through each such date.
4. Forfeiture upon Termination of Status as a Service Provider . Notwithstanding any contrary provision of this Award Agreement, if the Participant ceases to be a Service Provider for any or no reason, the then-unvested RSUs awarded by this Award Agreement will thereupon be forfeited at no cost to the Company and the Participant will have no further rights thereunder.
5. Payment after Vesting .
(a) Any RSUs that vest in accordance with Section 3 will be paid to the Participant (or in the event of the Participants death, pursuant to Section 6 hereof) in whole Shares, provided that to the extent determined appropriate by the Company, any federal, state and local withholding taxes with respect to such RSUs will be paid by reducing the number of Shares actually paid to the Participant. The Company shall issue to the Participant, on a date within thirty (30) days following the Settlement Date, a number of whole Shares equal to the vested RSUs. Such Shares shall not be subject to any restriction on transfer other than any such restriction as may be required pursuant to Section 7.
(b) Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the Restricted Stock Units is accelerated in connection with the Participants termination as a Service Provider (provided that such termination is a separation from service within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) the Participant is a specified employee within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of such accelerated Restricted Stock Units will result in the
imposition of additional tax under Section 409A if paid to the Participant on or within the six (6) month period following the Participants termination as a Service Provider, then the payment of such accelerated Restricted Stock Units will not be made until the date six (6) months and one (1) day following the date of the Participants termination as a Service Provider, unless the Participant dies following his or her termination as a Service Provider, in which case, the Restricted Stock Units will be paid in Shares in accordance with Section 6 as soon as practicable following his or her death. It is the intent of this Award Agreement to comply with the requirements of Section 409A so that none of the Restricted Stock Units provided under this Award Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Award Agreement, Section 409A means Section 409A of the Code, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.
6. Payments after Death . Any distribution or delivery to be made to the Participant under this Award Agreement will, if the Participant is then deceased, be made to the Participants designated beneficiary, or if no beneficiary survives the Participant, administrator or executor of the Participants estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
7. Deferral Election . If permitted, the Participant may elect to defer delivery of the payment of any Shares, which election will be subject to such documentation as the Company may promptly and reasonably request, and any terms under the Silicon Valley Bank Deferred Compensation Plan as the Committee deems appropriate. Unless otherwise determined by the Committee, any such deferral election by the Participant will be void and not given effect unless the Participants deferral election is made at least twelve (12) months prior to the date the Shares otherwise are scheduled to be paid. The Committee may require that the Participant make an election earlier than twelve (12) months prior to the date the Shares are scheduled to be paid. Upon the date the Shares vest to which a deferral election applies, the Company will create a bookkeeping entry initially representing an amount equivalent to the Fair Market Value of the number of Shares that would have otherwise been payable hereunder had a deferral election not been made. Any such obligation will represent an unfunded and unsecured obligation of the Company.
8. Withholding of Taxes . Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares will be issued to the Participant, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by the Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such Shares so issuable. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit the Participant to satisfy such tax withholding obligation, in whole or in part by one or more of the following: (a) paying cash, (b) electing to have the Company withhold otherwise deliverable Shares having a Fair Market Value equal to the minimum amount required to be withheld, (c) delivering to the Company already vested and owned Shares having a Fair Market Value equal to the amount required to be withheld, or (d) selling a sufficient number of such Shares otherwise
deliverable to Participant through such means as the Company may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. If the Participant fails to make satisfactory arrangements for the payment of any required tax withholding obligations hereunder at the time any applicable RSUs otherwise are scheduled to vest pursuant to Section 3, the Participant will permanently forfeit such RSUs and the RSUs will be returned to the Company at no cost to the Company and the Participant will have no rights to acquire any Shares with respect thereto.
9. Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant.
10. No Effect on Service . The Participants service with the Company and its Subsidiaries is on an at-will basis only. Accordingly, the terms of the Participants service with the Company and its Affiliates will be determined from time to time by the Company or the Affiliate employing or retaining the Participant (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the service of the Participant at any time for any reason whatsoever, with or without Cause.
11. Address for Notices . Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company at 3003 Tasman Drive, Mail Sort HA 200, Santa Clara, CA 95054, Attn: Investor Relations and Stock Plan Administration Manager, or at such other address as the Company may hereafter designate in writing.
12. Grant is Not Transferable . Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.
13. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
14. Additional Conditions to Issuance of Stock . If at any time the Company will determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to the issuance of Shares to the Participant (or his estate), such issuance will not occur unless and until such listing, registration, qualification, consent or approval will have been effected or obtained free of any conditions not acceptable to the Company. Where the Company determines that the delivery of
the payment of any Shares will violate federal securities laws or other applicable laws, the Company will defer delivery until the earliest date at which the Company reasonably anticipates that the delivery of Shares will no longer cause such violation. The Company will make all reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.
15. Plan Governs . This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
16. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.
17. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
18. Agreement Severable . In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
19. Modifications to the Agreement . This Award Agreement constitutes the entire understanding of the parties on the subjects covered. The Participant expressly warrants that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A in connection to this Award of RSUs.
20. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
21. Authorization to Release and Transfer Necessary Personal Information . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of RSUs under the Plan or with whom Shares acquired pursuant to the vesting of the RSUs or cash from the sale of such Shares may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the RSUs, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
22. Governing Law . This Award Agreement will be governed by the laws of the State of California, without giving effect to the conflict of law principles thereof. For purposes of litigating any dispute that arises under this Award of RSUs or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California , and agree that such litigation shall be conducted in the courts of Santa Clara County, California , or the federal courts for the United States for the Northern District of California, and no other courts, where this Award of RSUs is made and/or to be performed.
EXHIBIT 10.19
Notice of Grant of Restricted Stock Unit Award and Award Agreement (Employees) |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Restricted Stock Units: | ||||
Date of Grant: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an Award of Restricted Stock Units (RSUs) under the SVB Financial Group 2006 Equity Incentive Plan (the Plan).
RSUs in each period will vest in increments on the dates shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date.
Unless otherwise defined herein or in the Award Agreement, capitalized terms herein or in the Award Agreement will have the defined meanings ascribed to them in the Plan.
By your acceptance and the Companys signature below, you and the Company agree that these RSUs are granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the this Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK UNIT AWARD AGREEMENT
1. Grant . The Company hereby grants to the Participant under the Plan an Award of the number of RSUs set forth on the first page, subject to all of the terms and conditions in this Award Agreement and the Plan.
2. Companys Obligation to Pay . Each RSU represents the right to receive a share of Common Stock (Share) on the date it becomes vested. Unless and until the RSUs will have vested in the manner set forth in Sections 3 and 4, the Participant will have no right to payment of any such RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3. Vesting Schedule . Subject to Section 4, the RSUs awarded by this Award Agreement will vest in the Participant according to the vesting schedule set forth on the attached Restricted Stock Unit Agreement, subject to the Participant continuing to be a Service Provider through each such date.
4. Forfeiture upon Termination of Status as a Service Provider . Notwithstanding any contrary provision of this Award Agreement, if the Participant ceases to be a Service Provider for any or no reason, the then-unvested RSUs awarded by this Award Agreement will thereupon be forfeited at no cost to the Company and the Participant will have no further rights thereunder.
5. Payment after Vesting .
(a) Any RSUs that vest in accordance with Section 3 will be paid to the Participant (or in the event of the Participants death, pursuant to Section 6 hereof) in whole Shares, provided that to the extent determined appropriate by the Company, any federal, state and local withholding taxes with respect to such RSUs will be paid by reducing the number of Shares actually paid to the Participant. Subject to the provisions of Section 5(b), such vested Restricted Stock Units shall be paid in Shares as soon as practicable after vesting, but in each such case no later than the date that is two-and-one-half (2 1 / 2 ) months from the later of (i) the end of the Companys tax year that includes the vesting date, or (ii) the end of Participants tax year that includes the vesting date.
(b) Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the Restricted Stock Units is accelerated in connection with the Participants termination as a Service Provider (provided that such termination is a separation from service within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) the Participant is a specified employee within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of such accelerated Restricted Stock Units will result in the
imposition of additional tax under Section 409A if paid to the Participant on or within the six (6) month period following the Participants termination as a Service Provider, then the payment of such accelerated Restricted Stock Units will not be made until the date six (6) months and one (1) day following the date of the Participants termination as a Service Provider, unless the Participant dies following his or her termination as a Service Provider, in which case, the Restricted Stock Units will be paid in Shares in accordance with Section 6 as soon as practicable following his or her death. It is the intent of this Award Agreement to comply with the requirements of Section 409A so that none of the Restricted Stock Units provided under this Award Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Award Agreement, Section 409A means Section 409A of the Code, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.
6. Payments after Death . Any distribution or delivery to be made to the Participant under this Award Agreement will, if the Participant is then deceased, be made to the Participants designated beneficiary, or if no beneficiary survives the Participant, administrator or executor of the Participants estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
7. Withholding of Taxes . Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares will be issued to the Participant, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by the Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such Shares so issuable. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit the Participant to satisfy such tax withholding obligation, in whole or in part by one or more of the following: (a) paying cash, (b) electing to have the Company withhold otherwise deliverable Shares having a Fair Market Value equal to the minimum amount required to be withheld, (c) delivering to the Company already vested and owned Shares having a Fair Market Value equal to the amount required to be withheld, or (d) selling a sufficient number of such Shares otherwise deliverable to Participant through such means as the Company may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. If the Participant fails to make satisfactory arrangements for the payment of any required tax withholding obligations hereunder at the time any applicable RSUs otherwise are scheduled to vest pursuant to Section 3, the Participant will permanently forfeit such RSUs and the RSUs will be returned to the Company at no cost to the Company and the Participant will have no rights to acquire any Shares with respect thereto.
8. Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant.
9. No Effect on Service . The Participants service with the Company and its Subsidiaries is on an at-will basis only. Accordingly, the terms of the Participants service with the Company and its Affiliates will be determined from time to time by the Company or the Affiliate employing or retaining the Participant (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the service of the Participant at any time for any reason whatsoever, with or without Cause.
10. Address for Notices . Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company at 3003 Tasman Drive, Mail Sort HA 200, Santa Clara, CA 95054, Attn: Investor Relations and Stock Plan Administration Manager, or at such other address as the Company may hereafter designate in writing.
11. Grant is Not Transferable . Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.
12. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
13. Additional Conditions to Issuance of Stock . If at any time the Company will determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to the issuance of Shares to the Participant (or his estate), such issuance will not occur unless and until such listing, registration, qualification, consent or approval will have been effected or obtained free of any conditions not acceptable to the Company. Where the Company determines that the delivery of the payment of any Shares will violate federal securities laws or other applicable laws, the Company will defer delivery until the earliest date at which the Company reasonably anticipates that the delivery of Shares will no longer cause such violation. The Company will make all reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.
14. Plan Governs . This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
15. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.
16. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
17. Agreement Severable . In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
18. Modifications to the Agreement . This Award Agreement constitutes the entire understanding of the parties on the subjects covered. The Participant expressly warrants that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A in connection to this Award of RSUs.
19. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
20. Authorization to Release and Transfer Necessary Personal Information . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant
authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of RSUs under the Plan or with whom Shares acquired pursuant to the vesting of the RSUs or cash from the sale of such Shares may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the RSUs, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
21. Governing Law . This Award Agreement will be governed by the laws of the State of California, without giving effect to the conflict of law principles thereof. For purposes of litigating any dispute that arises under this Award of RSUs or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California , and agree that such litigation shall be conducted in the courts of Santa Clara County, California , or the federal courts for the United States for the Northern District of California, and no other courts, where this Award of RSUs is made and/or to be performed.
EXHIBIT 10.20
Notice of Grant of Restricted Stock Award and Award Agreement |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Shares of Restricted Stock: | ||||
Date of Grant: | ||||
Purchase Price per Share: | ||||
Total Purchase Price: | ||||
Expiration Date: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an award of SVB Financial Group (the Company) Restricted Stock (the Award). These Shares are restricted until the Vesting Date(s) show above. The current total value of the Award is $ .
Shares in each period will vest in increments on the date(s) shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date.
By your acceptance and the Companys signature below, you and the Company agree that this Award is granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK AWARD AGREEMENT
SVB Financial Group (the Company), pursuant to its 2006 Equity Incentive Plan (the Plan), has awarded to Participant Shares of Restricted Stock.
The Award hereunder is in connection with and in furtherance of the Companys discretionary bonus program for participation of the Companys Service Providers. Defined terms not explicitly defined in this Award Agreement shall have the same definitions as in the Plan or in the Notice of Grant of Restricted Stock (Notice of Grant), to which this Award Agreement is attached.
The details of your Award are as follows:
1. T OTAL NUMBER OF SHARES SUBJECT TO THIS A WARD . The total number of Shares subject to this Award is set forth in the Notice of Grant.
2. F ORFEITURE R ESTRICTION . Subject to the terms of Section 3(a), in the event Participant ceases to be a Service Provider for any or no reason (including death or Disability) before the respective Vesting Dates (as set forth in the Notice of Grant), Participant shall forfeit the then Unreleased Shares (defined below) to the Company. Upon such forfeiture, the Company shall become the legal and beneficial owner of the Shares being forfeited and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being forfeited.
3. R ELEASE OF S HARES F ROM F ORFEITURE R ESTRICTION .
(a) Subject to the limitations contained herein, the Shares will vest (be released) as set forth in the Notice of Grant until either (i) the Shares become fully vested or (ii) Participant ceases to be a Service Provider for any reason. Notwithstanding the foregoing, upon the occurrence of a Change in Control and subject to Participants Covered Termination (as defined in the Companys Change in Control Severance Benefit Policy for Non-Executives), all then Unreleased Shares shall be released from the forfeiture restriction. (The period beginning on the date of this Award Agreement and ending on each respective Vesting Date shall be referred to as the Period of Restriction).
(b) Until the Shares have been released from the forfeiture restriction, they may be referred to herein as Unreleased Shares.
-2-
(c) The Unreleased Shares may bear the following forfeiture restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FORFEITURE IN FAVOR OF THE COMPANY, AS SET FORTH IN A STOCK AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
(d) The Share certificates representing the Shares, when released from the forfeiture restriction, shall be delivered to Participant pursuant to Section 4 of this Award Agreement.
4. I SSUANCE OF S HARE C ERTIFICATES .
(a) The certificates evidencing the Shares shall be held in escrow by the secretary of the Company until the end of the respective Period of Restrictions (or earlier, upon a Covered Termination), at which time it shall be released to Participant by the Company in accordance with the provisions hereof.
(b) At the end of each Period of Restriction, the Company shall cause the appropriate certificate representing the Shares (then released from the forfeiture restriction) to be delivered to Participant; provided, however that prior to such delivery Participant shall remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements in connection with the Shares then to be released.
(c) Subject to the terms hereof, Participant shall have all the rights of a stockholder with respect to such Shares before the Shares are released from the forfeiture restriction, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. In the event of any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares, the Unreleased Shares will be increased, reduced or otherwise changed, and by virtue of any such change Participant will in his or her capacity as owner of Unreleased Shares be entitled to new or additional or different shares of stock, cash or securities (other than rights or warrants to purchase securities); such new or additional or different shares, cash or securities will thereupon be considered to be Unreleased Shares and will be subject to all of the conditions and restrictions which were applicable to the Unreleased Shares pursuant to this Award Agreement. If Participant receives rights or warrants with respect to any Unreleased Shares, such rights or warrants may be held or exercised by Participant, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants will be considered to be Unreleased Shares and will be subject to all of the conditions and restrictions which were applicable to the Unreleased Shares pursuant to this Award Agreement. The Administrator in its absolute discretion at any time may accelerate the vesting of all or any portion of such new or additional shares of stock, cash or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants.
-3-
5. A DJUSTMENTS . All references to the number of Shares in this Award Agreement shall be appropriately adjusted to reflect any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs after the date of this Award Agreement.
6. P ARTICIPANT S R EPRESENTATIONS .
(a) Tax Consequences. Participant has reviewed with Participants own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Award Agreement. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participants own tax liability that may arise as a result of this investment or the transactions contemplated by this Award Agreement.
(b) Tax Withholding. Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares of Restricted Stock may be released from the escrow established pursuant to Section 4, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such Shares. To the extent determined appropriate by the Company in its discretion, it shall have the right (but not the obligation) to satisfy any tax withholding obligations by reducing the number of Shares otherwise deliverable to Participant. If Participant fails to make satisfactory arrangements for the payment of any required tax withholding obligations hereunder at the time any applicable Shares otherwise are scheduled to vest, Participant will permanently forfeit such Shares and the Shares will be returned to the Company at no cost to the Company.
7. A WARD N OT A S ERVICE C ONTRACT . This Award is not a guarantee of continued service and nothing in this Award shall be deemed to create in any way whatsoever any obligation on Participants part to continue in the service of the Company, or of the Company to continue Participants service with the Company. In addition, nothing in this Award shall obligate the Company or any Affiliate, or their respective stockholders, Board of Directors, officers or employees to continue any relationship which Participant might have as a Service Provider for the Company or Affiliate.
8. G OVERNING P LAN D OCUMENT . This Award is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this Award, including without limitation the provisions of Section 8 of the Plan relating to Restricted Stock provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this Award and those of the Plan, the provisions of the Plan shall control.
-4-
9 . A DDITIONAL C ONDITIONS TO R ELEASE F ROM E SCROW . The Company will not be required to issue any certificate or certificates for Shares hereunder or release such Shares from the escrow established pursuant to Section 4 prior to fulfillment of all the following conditions: (a) the admission of such Shares to listing on all stock exchanges on which such class of stock is then listed; (b) the completion of any registration or other qualification of such Shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Administrator will, in its absolute discretion, deem necessary or advisable; (c) the obtaining of any approval or other clearance from any state or federal governmental agency, which the Administrator will, in its absolute discretion, determine to be necessary or advisable; and (d) the lapse of such reasonable period of time following the date of grant of the Restricted Stock as the Administrator may establish from time to time for reasons of administrative convenience.
10. G ENERAL P ROVISIONS .
(a) This Award Agreement shall be governed by the laws of the State of California. This Award Agreement and the Plan represent the entire agreement between the parties with respect to the receipt of the Shares by Participant. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the consent of Participant, to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the Code) or to otherwise avoid imposition of any additional tax or income recognition under Section 409A of the Code in connection to this Award of Restricted Stock.
(b) The rights and benefits of the Company under this Award Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Companys successors and assigns. The rights and obligations of Participant under this Award Agreement may only be assigned with the prior written consent of the Company.
(c) Either partys failure to enforce any provision or provisions of this Award Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party from thereafter enforcing each and every other provision of this Award Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either partys right to assert all other legal remedies available to it under the circumstances.
(d) Participant agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Award Agreement.
By Participants electronic signature on the Notice of Grant, Participant represents that this Award Agreement in its entirety has been reviewed, has had an opportunity to obtain the advice of counsel prior to executing this Award Agreement and fully understands all provisions of this Award Agreement.
-5-
11. E LECTRONIC D ELIVERY . The Company may, in its sole discretion, decide to deliver any documents related to Awards granted under the Plan or future Awards that may be granted under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
12. A UTHORIZATION TO R ELEASE AND T RANSFER N ECESSARY P ERSONAL I NFORMATION . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Awards under the Plan or with whom Shares acquired pursuant to the vesting of the Award or cash from the sale of such Shares may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Awards, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
-6-
EXHIBIT 10.23
Notice of Grant of Restricted Stock Unit Award and Award Agreement (Directors) |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Restricted Stock Units: | ||||
Date of Grant: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an Award of Restricted Stock Units (RSUs) under the SVB Financial Group 2006 Equity Incentive Plan (the Plan).
RSUs in each period will vest in increments on the dates shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date. Unless otherwise specified in the Restricted Stock Unit Election Form (the Election), the Settlements Dates for the RSUs shall be the Vesting Dates.
Unless otherwise defined herein or in the Award Agreement, capitalized terms herein or in the Award Agreement will have the defined meanings ascribed to them in the Plan.
By your acceptance and the Companys signature below, you and the Company agree that these RSUs are granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the this Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK UNIT AWARD AGREEMENT
1. Grant . The Company hereby grants to the Participant under the Plan an Award of the number of RSUs set forth on the first page, subject to all of the terms and conditions in this Award Agreement and the Plan.
2. Companys Obligation to Pay . Each RSU represents the right to receive a share of Common Stock (Share). Unless and until the RSUs will have vested in the manner set forth in Sections 3 and 4, the Participant will have no right to payment of any such RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3. Vesting Schedule . Subject to Section 4, the RSUs awarded by this Award Agreement will vest in the Participant according to the vesting schedule set forth on the attached Restricted Stock Unit Agreement, subject to the Participant continuing to be a Service Provider through each such date.
4. Forfeiture upon Termination of Status as a Service Provider . Notwithstanding any contrary provision of this Award Agreement, if the Participant ceases to be a Service Provider for any or no reason, the then-unvested RSUs awarded by this Award Agreement will thereupon be forfeited at no cost to the Company and the Participant will have no further rights thereunder.
5. Payment after Vesting .
(a) Any RSUs that vest in accordance with Section 3 will be paid to the Participant (or in the event of the Participants death, pursuant to Section 6 hereof) in whole Shares, provided that to the extent determined appropriate by the Company, any federal, state and local withholding taxes with respect to such RSUs will be paid by reducing the number of Shares actually paid to the Participant. The Company shall issue to the Participant, on a date within thirty (30) days following the Settlement Date, a number of whole Shares equal to the vested RSUs. Such Shares shall not be subject to any restriction on transfer other than any such restriction as may be required pursuant to Section 7.
(b) Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the Restricted Stock Units is accelerated in connection with the Participants termination as a Service Provider (provided that such termination is a separation from service within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) the Participant is a specified employee within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of such accelerated Restricted Stock Units will result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six (6) month period following the
Participants termination as a Service Provider, then the payment of such accelerated Restricted Stock Units will not be made until the date six (6) months and one (1) day following the date of the Participants termination as a Service Provider, unless the Participant dies following his or her termination as a Service Provider, in which case, the Restricted Stock Units will be paid in Shares in accordance with Section 6 as soon as practicable following his or her death. It is the intent of this Award Agreement to comply with the requirements of Section 409A so that none of the Restricted Stock Units provided under this Award Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Award Agreement, Section 409A means Section 409A of the Code, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.
6. Payments after Death . Any distribution or delivery to be made to the Participant under this Award Agreement will, if the Participant is then deceased, be made to the Participants designated beneficiary, or if no beneficiary survives the Participant, administrator or executor of the Participants estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
7. Withholding of Taxes . Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares will be issued to the Participant, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by the Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such Shares so issuable. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit the Participant to satisfy such tax withholding obligation, in whole or in part by one or more of the following: (a) paying cash, (b) electing to have the Company withhold otherwise deliverable Shares having a Fair Market Value equal to the minimum amount required to be withheld, (c) delivering to the Company already vested and owned Shares having a Fair Market Value equal to the amount required to be withheld, or (d) selling a sufficient number of such Shares otherwise deliverable to Participant through such means as the Company may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. If the Participant fails to make satisfactory arrangements for the payment of any required tax withholding obligations hereunder at the time any applicable RSUs otherwise are scheduled to vest pursuant to Section 3, the Participant will permanently forfeit such RSUs and the RSUs will be returned to the Company at no cost to the Company and the Participant will have no rights to acquire any Shares with respect thereto.
8. Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant.
9. No Effect on Service . The Participants service with the Company and its Subsidiaries is on an at-will basis only. Accordingly, the terms of the Participants service with the Company and its Affiliates will be determined from time to time by the Company or the Affiliate employing or retaining the Participant (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the service of the Participant at any time for any reason whatsoever, with or without Cause.
10. Address for Notices . Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company at 3003 Tasman Drive, Mail Sort HA 200, Santa Clara, CA 95054, Attn: Investor Relations and Stock Plan Administration Manager, or at such other address as the Company may hereafter designate in writing.
11. Grant is Not Transferable . Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.
12. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
13. Additional Conditions to Issuance of Stock . If at any time the Company will determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to the issuance of Shares to the Participant (or his estate), such issuance will not occur unless and until such listing, registration, qualification, consent or approval will have been effected or obtained free of any conditions not acceptable to the Company. Where the Company determines that the delivery of the payment of any Shares will violate federal securities laws or other applicable laws, the Company will defer delivery until the earliest date at which the Company reasonably anticipates that the delivery of Shares will no longer cause such violation. The Company will make all reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.
14. Plan Governs . This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
15. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.
16. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
17. Agreement Severable . In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
18. Modifications to the Agreement . This Award Agreement constitutes the entire understanding of the parties on the subjects covered. The Participant expressly warrants that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A in connection to this Award of RSUs.
19. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
20. Authorization to Release and Transfer Necessary Personal Information . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and
management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of RSUs under the Plan or with whom Shares acquired pursuant to the vesting of the RSUs or cash from the sale of such Shares may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the RSUs, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
21. Governing Law . This Award Agreement will be governed by the laws of the State of California, without giving effect to the conflict of law principles thereof. For purposes of litigating any dispute that arises under this Award of RSUs or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California , and agree that such litigation shall be conducted in the courts of Santa Clara County, California , or the federal courts for the United States for the Northern District of California, and no other courts, where this Award of RSUs is made and/or to be performed.
EXHIBIT 10.30
SVB FINANCIAL GROUP
AMENDMENT TO BENEFIT PLANS TO COMPLY
WITH EMERGENCY ECONOMIC STABILIZATION ACT, AS AMENDED
As Adopted by the Compensation Committee as of July 22, 2009
RECITALS
WHEREAS, on December 12, 2008, SVB Financial Group (the Company ) entered into a Securities Purchase Agreement with the United States Department of Treasury (the Agreement ) as part of the Capital Purchase Program under the Troubled Asset Relief Program ( TARP ) of the Emergency Economic Stabilization Act of 2008 ( EESA );
WHEREAS, on February 11, 2009, EESA was amended by the American Recovery and Reinvestment Act of 2009 ( ARRA ) to revise EESAs original executive compensation requirements and add additional requirements applicable to institutions with outstanding TARP obligations;
WHEREAS, on June 15, 2009, the United States Department of Treasury issued Interim Final Rules (the Interim Final Rules ) to clarify and make certain revisions to the executive compensation requirements under EESA, as amended by ARRA;
WHEREAS, pursuant to Section 1.2(d)(iv) of the Agreement, the Company is required to amend its Benefit Plans with respect to its Senior Executive Officers (as defined by EESA, as amended) and certain other highly compensated employees (as required by EESA, as amended, and the Interim Final Rules) to the extent necessary to comply with Section 111 of EESA, as amended; and
WHEREAS, the applicable Benefit Plans are the plans in which any Senior Executive Officer and other highly compensated employees participate, or are eligible to participate, and the agreements to which they are a party, that either: (i) provide for incentive compensation based on the achievement of performance goals ( Incentive Plans ) or (ii) provide for payments or benefits upon a Change of Control of the Company or severance from employment ( Golden Parachute Plans ). Such Benefit Plans include but are not limited to the SVB Capital Carried Interest Long-Term Incentive Plan, SVB Financial Group 2006 Equity Incentive Plan, SVB Financial Group Change in Control Severance Plan, and any agreement and/or contract entered into by and between the Senior Executive Officers and certain other highly compensated employees of the Company.
RESOLUTIONS
RESOLVED, that each Incentive Plan and Golden Parachute Plan is hereby amended effective as of the date of entry into the Agreement as follows:
1. Compliance With Section 111 of EESA . Each Incentive Plan and Golden Parachute Plan is hereby amended by adding the
following provision as a final section to such arrangement (to the extent any Incentive Plan or Golden Parachute Plan was previously amended pursuant to a Global Amendment to Equity Plans to Comply with EESA, adopted as of November 21, 2008, the following amendment shall replace the previous amendment in its entirety):
Compliance With Section 111 of EESA . Solely to the extent, and for the period, required by the provisions of Section 111 of the Emergency Economic Stabilization Act of 2008, as amended by ARRA and the Interim Final Rules ( EESA, as amended ), applicable to participants in the Treasurys Capital Purchase Program under the Troubled Asset Relief Program: (a) each Senior Executive Officer within the meaning of Section 111 of EESA, as amended, shall be ineligible to receive compensation hereunder to the extent that the Compensation Committee of the Board of Directors of the Company determines this plan or agreement includes incentives for the Senior Executive Officer to take unnecessary and excessive risks that threaten the value of the financial institution; (b) each Senior Executive Officer and certain other highly compensated employees (as required by EESA, as amended) who participate in this plan or is a party to this agreement shall be required to forfeit any bonus or incentive compensation paid to such individual based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (c) the Company shall be prohibited from paying each Senior Executive Officer and certain other highly compensated employees (as required by EESA, as amended) who participate in this plan or is a party to this agreement any form of incentive compensation (as defined by EESA, as amended) with the exception of certain restricted stock awards that are exempt from this requirement (as defined by EESA, as amended); and (d) the Company shall be prohibited from making to each Senior Executive Officer and certain other highly compensated employees (as required by EESA, as amended) who participate in this plan or is a party to this agreement, and each such Senior Executive Officer and certain other highly compensated employee shall be ineligible to receive hereunder, any golden parachute payment (as defined by EESA, as amended) in connection with a Change in Control of the Company or such individuals severance from employment.
2. Continuation of Affected Plans . Except as expressly or by necessary implication amended hereby, each Incentive Plan and Golden Parachute Plan shall continue in full force and effect.
EXHIBIT 10.32
Notice of Grant of Stock Appreciation Rights and Award Agreement |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Grant Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Shares Granted: | ||||
Date of Grant: | ||||
Exercise Price per Share: | ||||
Total Exercise Price: | ||||
Expiration Date: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted a Stock Appreciation Right covering Shares of SVB Financial Group (the Company) at the Total Exercise Price listed in the Grant Agreement above (the SAR). Shares in each period will become fully vested on the dates shown in the Vesting Schedule, subject to the Participant continuing to be a Service Provider through each such date.
This Stock Appreciation Right will be exercisable for [three (3) months] after Participant ceases to be a Service Provider, unless such termination is due to Participants death or Disability, in which case this Stock Appreciation Right will be exercisable for [one (1) year] after Participant ceases to be Service Provider. Notwithstanding the foregoing, in no event may this Stock Appreciation Right be exercised after the Expiration Date as provided above.
By your acceptance and the Companys signature below, you and the Company agree that this Stock Appreciation Right is granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
STOCK APPRECIATION RIGHT AWARD AGREEMENT
SVB Financial Group (the Company), pursuant to its 2006 Equity Incentive Plan (the Plan), has granted to Participant a Stock Appreciation Right (SAR) covering shares of the Common Stock of the Company (Shares).
The grant hereunder is in connection with and in furtherance of the Companys compensatory benefit plan for participation of the Companys Service Providers. Defined terms not explicitly defined in this Award Agreement shall have the same definitions as in the Plan or in the Notice of Grant of Stock Appreciation Rights (Notice of Grant), to which this Award Agreement is attached.
The details of Participants SAR are as follows:
1. T OTAL N UMBER O F S HARES S UBJECT T O T HIS SAR. The number of Shares subject to this SAR is set forth in the Notice of Grant.
2. V ESTING . Subject to the limitations contained herein, the SAR will vest as set forth in the Notice of Grant until either (i) Participant ceases to be a Service Provider for any reason, or (ii) this SAR becomes fully vested.
3. SAR P RICE A ND M ETHOD O F E XERCISE .
(a) Right to Exercise . This SAR is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Award Agreement.
(b) Method of Exercise . This SAR is exercisable by (i) delivery of an exercise notice, in the form and manner determined by the Administrator, or (ii) following an electronic or other exercise procedure prescribed by the Administrator, which in either case shall state the election to exercise the SAR, the number of Shares in respect of which the SAR is being exercised (the Exercised Shares), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. Participant shall provide payment of any applicable tax withholding arising in connection with such exercise. This SAR shall be deemed to be exercised upon receipt by the Company of a fully executed exercise notice or completion of such exercise procedure, as the Administrator may determine in its sole discretion, accompanied by any applicable tax withholding.
(c) Payment upon Exercise . Upon exercise of all or a specified portion of the SAR, Participant shall be entitled to receive from the Company an amount in cash in one lump sum payment determined by multiplying (a) the difference (if any) obtained by subtracting (i) the Exercise Price Per Share as set forth in the Notice of Grant from (ii) the Fair Market Value of a Share on the date of exercise of the SAR, by (b) the number of Shares with respect to which the SAR is exercised, reduced by any applicable tax withholding and subject to any limitations the Administrator may impose. Such cash payment shall be made as soon as practicable, but in no event later than thirty (30) days following the date of exercise.
No payment shall be made pursuant to the exercise of this SAR unless such payment complies with Applicable Laws. Assuming such compliance, for income tax purposes, the payment shall be considered made to Participant on the date the SAR is exercised with respect to such Exercised Shares.
4. T ERM . This SAR may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Award Agreement.
5. T RANSFERABILITY . This SAR may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Plan and this Award Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of Participant.
6. SAR N OT A S ERVICE C ONTRACT . This SAR is not a guarantee of continued service and nothing in this SAR shall be deemed to create in any way whatsoever any obligation on Participants part to continue as a Service Provider, or of the Company to continue Participants service as a Service Provider. In addition, nothing in this SAR shall obligate the Company or any Affiliate, or their respective stockholders, Board of Directors, officers or employees to continue any relationship which Participant might have as a Service Provider.
7. T AX AND W ITHHOLDING . Participant agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Participant) for the satisfaction of all Federal, state, local and foreign income and employment tax withholding requirements as well as social security charges applicable to the vesting of the SAR, the exercise of the SAR or the payment of any amounts with respect to the SAR. In this regard, Participant authorizes the Company (and/or the Parent or Subsidiary employing or retaining Participant) to withhold all applicable taxes legally payable by Participant from Participants cash payment required under this Award Agreement, wages or other cash compensation paid to Participant by the Company (and/or the Parent or Subsidiary employing or retaining Participant) in an amount sufficient to cover such tax obligations. Participant acknowledges and agrees that the Company may refuse to honor the exercise and refuse to make the payment required under this Award Agreement if such withholding amounts are not delivered at the time of exercise.
Participant understands that he or she may suffer adverse tax consequences as a result of Participants grant, vesting or exercise of this SAR. Participant represents that he or she will consult with any tax advisors Participant deems appropriate in connection with the grant, vesting or exercise of this SAR and that Participant is not relying on the Company for any tax advice.
Under Section 409A of the Internal Revenue Code of 1986, as amended, a SAR that vests after December 31, 2004 (or that vested on or prior to such date but which was materially modified after October 3, 2004), that was granted with a per Share exercise price that is determined by the Internal Revenue Service (the IRS) to be less than the Fair Market Value of a Share on the date of grant (a discount SAR) may be considered deferred compensation. A SAR that is a discount SAR may result in (i) income recognition by the Participant prior to the exercise of the SAR, (ii) an additional 20% federal tax, and (iii) potential penalty and interest charges. The discount SAR may also result in additional state income, penalty and interest tax to the Participant. Participant
2
acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share exercise price of this SAR equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. Participant agrees that if the IRS determines that this SAR was granted with a per Share exercise price that was less than the Fair Market Value of a Share on the date of grant, Participant will be solely responsible for Participants costs related to such a determination.
8. G OVERNING P LAN D OCUMENT . This SAR is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this SAR, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this SAR and those of the Plan, the provisions of the Plan shall control.
9. E LECTRONIC D ELIVERY . The Company may, in its sole discretion, decide to deliver any documents related to this SAR Award under the Plan or future SARs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
10. A UTHORIZATION TO R ELEASE AND T RANSFER N ECESSARY P ERSONAL I NFORMATION . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Awards under the Plan or with whom Shares acquired pursuant to the vesting of the Awards. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her
3
participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Awards, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
11. N OTICES . Any notices provided for in this Award Agreement or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to Participant, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as Participant hereafter designates by written notice to the Company.
4
EXHIBIT 10.33
Notice of Grant of Restricted Stock Unit Award and Award Agreement (Employees) |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID: |
Grant Agreement: | ||||
Participant Name: |
||||
Employee ID: |
||||
Grant Number: |
||||
Number of Restricted Stock Units: |
||||
Date of Grant: |
||||
Vesting Schedule: |
||||
Vesting Date | Shares | |||
|
||||
|
||||
|
Effective on the Date of Grant listed above, you have been granted an Award of Restricted Stock Units (RSUs) under the SVB Financial Group 2006 Equity Incentive Plan (the Plan).
RSUs in each period will vest in increments on the dates shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date.
Unless otherwise defined herein or in the Award Agreement, capitalized terms herein or in the Award Agreement will have the defined meanings ascribed to them in the Plan.
By your acceptance and the Companys signature below, you and the Company agree that these RSUs are granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the this Award Agreement, all of which are attached and made a part of this document. |
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK UNIT AWARD AGREEMENT
1. Grant . The Company hereby grants to the Participant under the Plan an Award of the number of RSUs set forth on the first page, subject to all of the terms and conditions in this Award Agreement and the Plan.
2. Companys Obligation to Pay . Each RSU represents the right to receive a cash payment equivalent to the value of a share of Common Stock (Share) on the date it becomes vested. Unless and until the RSUs will have vested in the manner set forth in Sections 3 and 4, the Participant will have no right to payment in connection with any RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3. Vesting Schedule . Subject to Section 4, the RSUs awarded by this Agreement will vest in the Participant according to the vesting schedule set forth on the attached Restricted Stock Unit Agreement, subject to the Participant continuing to be a Service Provider through each such date.
4. Forfeiture upon Termination of Status as a Service Provider . Notwithstanding any contrary provision of this Agreement, and subject to all Applicable Laws, if the Participant ceases to be a Service Provider for any or no reason, the then-unvested RSUs awarded by this Award Agreement will thereupon be forfeited at no cost to the Company and the Participant will have no further rights thereunder.
5. Payment after Vesting .
(a) Any RSUs that vest in accordance with Section 3 will be paid in cash to the Participant (or in the event of the Participants death, to his or her estate) based on the value equivalent to the number of applicable whole Shares, provided that to the extent determined appropriate by the Company, any Tax Liability (as defined in Section 7) with respect to such RSUs will be paid by reducing the amount otherwise payable to the Participant. Subject to the provisions of Section 5(b), any payment to be made pursuant to the settlement of the vested RSUs shall be paid in cash as soon as practicable after vesting, but in each such case no later than the date that is two-and-one-half months from the later of (i) the end of the Companys tax year that includes the vesting date, or (ii) the end of the Participants tax year that includes the vesting date.
(b) Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the RSUs is accelerated in connection with the Participants termination as a Service Provider (provided that such termination is a separation from service within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) the Participant is a specified employee within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of the value of such accelerated RSUs will result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six-month period
following the Participants termination as a Service Provider, then the payment of the value of such accelerated RSUs will not be made until the date six months and one-day following the date of the Participants termination as a Service Provider, unless the Participant dies following his or her termination as a Service Provider, in which case, the payment of the value of the vested RSUs will be paid to the Participants estate as soon as practicable following his or her death. It is the intent of this Award Agreement to comply with the requirements of Section 409A so that none of the RSUs provided under this Award Agreement or the payment issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Award Agreement, Section 409A means Section 409A of the Code, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.
6. Payments after Death . Any payment to be made to the Participant under this Award Agreement will, if the Participant is then deceased, be made to the Participants designated beneficiary, or if no beneficiary survives the Participant, administrator or executor of the Participants estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
7. Withholding of Taxes. Notwithstanding any contrary provision of this Award Agreement, the Company will have no obligation to make any payment in connection with the vested RSUs, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by the Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such payment (the Tax Liability).
The Participant acknowledges that the Companys obligation to make payment in connection with the RSUs shall be subject to satisfaction of the Tax Liability. Unless otherwise determined by the Company, withholding obligations shall be satisfied by having the Company or one if its Subsidiaries withhold the cash otherwise payable to the Participant upon settlement of the vested RSUs; provided that amounts withheld shall not exceed the amount necessary to satisfy the Companys tax withholding obligations. The Company or one of its Subsidiaries may also satisfy the Tax Liability by deduction from the Participants wages or other cash compensation paid to the Participant by the Company or the Subsidiary. Furthermore, the Participant agrees to pay the Company or the Subsidiary any Tax Liability that cannot be satisfied by deduction from the Participants wages or other cash compensation paid to the Participant by the Company or the Subsidiary. If the Participant fails to make satisfactory arrangements for the payment of any Tax Liability at the time any applicable RSUs otherwise are scheduled to vest, the Participant will permanently forfeit such RSUs and any right to receive payment thereunder and the RSUs will be returned to the Company at no cost to the Company.
8. Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares.
9. No Effect on Service . The Participants service with the Company and its Affiliates is on an at-will basis only. Accordingly, the terms of the Participants service with the
Company and its Affiliates will be determined from time to time by the Company or the Affiliate employing or retaining the Participant (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the service of the Participant at any time for any reason whatsoever, with or without Cause.
10. Address for Notices . Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company at 3003 Tasman Drive, Mail Sort HA 200, Santa Clara, CA 95054, Attn: Lisa Bertolet, or at such other address as the Company may hereafter designate in writing.
11. Grant is Not Transferable . Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.
12. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
13. Plan Governs . This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
14. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.
15. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
16. Agreement Severable . In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
17. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery
and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
18. Authorization to Release and Transfer Necessary Personal Information . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of RSUs under the Plan or cash pursuant to the vesting of the RSUs may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the RSUs, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
19. Compliance with Applicable Laws. The issuance, vesting, and settlement of the RSUs under the Plan shall be subject to compliance by the Company (or any Subsidiary) and the Participant with all Applicable Laws.
EXHIBIT 10.34
Notice of Grant of Restricted Stock Unit Award and Award Agreement (Directors) |
SVB FINANCIAL GROUP ID: 94-2875288 3003 Tasman Drive Santa Clara, CA 95054
|
|
Name Address City, State, Zip |
Award Number: Plan: 2006 Equity Incentive Plan ID:
|
Grant Agreement: | ||||
Participant Name: | ||||
Employee ID: | ||||
Grant Number: | ||||
Number of Restricted Stock Units: | ||||
Date of Grant: | ||||
Vesting Schedule: | ||||
Vesting Date | Shares | |||
Effective on the Date of Grant listed above, you have been granted an Award of Restricted Stock Units (RSUs) under the SVB Financial Group 2006 Equity Incentive Plan (the Plan).
RSUs in each period will vest in increments on the dates shown in the Vesting Schedule (Vesting Dates), subject to the Participant continuing to be a Service Provider through each such date. Unless otherwise specified in the Restricted Stock Unit Election Form (the Election), the Settlements Dates for the RSUs shall be the Vesting Dates.
Unless otherwise defined herein or in the Award Agreement, capitalized terms herein or in the Award Agreement will have the defined meanings ascribed to them in the Plan.
By your acceptance and the Companys signature below, you and the Company agree that these RSUs are granted under and governed by the terms and conditions of the Companys 2006 Equity Incentive Plan and the this Award Agreement, all of which are attached and made a part of this document.
|
|
|
SVB Financial Group | Date | |
|
|
|
Participant Name | Date |
SVB FINANCIAL GROUP
RESTRICTED STOCK UNIT AWARD AGREEMENT
1. Grant . The Company hereby grants to the Participant under the Plan an Award of the number of RSUs set forth on the first page, subject to all of the terms and conditions in this Award Agreement and the Plan.
2. Companys Obligation to Pay . Each RSU represents the right to receive a cash payment equivalent to the value of a share of Common Stock (Share) on the date it becomes vested. Unless and until the RSUs will have vested in the manner set forth in Sections 3 and 4, the Participant will have no right to payment in connection with any RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3. Vesting Schedule . Subject to Section 4, the RSUs awarded by this Award Agreement will vest in the Participant according to the vesting schedule set forth on the attached Restricted Stock Unit Agreement, subject to the Participant continuing to be a Service Provider through each such date.
4. Forfeiture upon Termination of Status as a Service Provider . Notwithstanding any contrary provision of this Award Agreement, and subject to all Applicable Laws, if the Participant ceases to be a Service Provider for any or no reason, the then-unvested RSUs awarded by this Award Agreement will thereupon be forfeited at no cost to the Company and the Participant will have no further rights thereunder.
5. Payment after Vesting .
(a) Any RSUs that vest in accordance with Section 3 will be paid in cash to the Participant (or in the event of the Participants death, to his or her estate) based on the value equivalent to the number of applicable whole Shares, provided that to the extent determined appropriate by the Company, any Tax Liability (as defined in Section 7) with respect to such RSUs will be paid by reducing the amount otherwise payable to the Participant. Subject to the provisions of Section 5(b), any payment to be made pursuant to the settlement of the vested RSUs shall be paid in cash as soon as practicable after vesting, but in each such case no later than the date that is two-and-one-half months from the later of (i) the end of the Companys tax year that includes the vesting date, or (ii) the end of the Participants tax year that includes the vesting date, or (iii) thirty (30) days following the Settlement Date.
(b) Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the RSUs is accelerated in connection with the Participants termination as a Service Provider (provided that such termination is a separation from service within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) the Participant is a specified employee within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of the value of such accelerated RSUs will result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six-month period following the Participants termination as a Service Provider, then the payment of the value of such accelerated RSUs will not be made until the date six months and one-day
following the date of the Participants termination as a Service Provider, unless the Participant dies following his or her termination as a Service Provider, in which case, the payment of the value of the vested RSUs will be paid to the Participants estate as soon as practicable following his or her death. It is the intent of this Award Agreement to comply with the requirements of Section 409A so that none of the RSUs provided under this Award Agreement or the payment issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Award Agreement, Section 409A means Section 409A of the Code, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.
6. Payments after Death . Any payment to be made to the Participant under this Award Agreement will, if the Participant is then deceased, be made to the Participants designated beneficiary, or if no beneficiary survives the Participant, administrator or executor of the Participants estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
7. Withholding of Taxes . Notwithstanding any contrary provision of this Award Agreement, the Company will have no obligation to make any payment in connection with the vested RSUs, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by the Participant with respect to the payment of income, employment and other taxes which the Company determines must be withheld with respect to such payment (the Tax Liability).
The Participant acknowledges that the Companys obligation to make payment in connection with the RSUs shall be subject to satisfaction of the Tax Liability. Unless otherwise determined by the Company, withholding obligations shall be satisfied by having the Company or one if its Subsidiaries withhold the cash otherwise payable to the Participant upon settlement of the vested RSUs; provided that amounts withheld shall not exceed the amount necessary to satisfy the Companys tax withholding obligations. The Company or one of its Subsidiaries may also satisfy the Tax Liability by deduction from the cash compensation paid to the Participant by the Company or the Subsidiary. Furthermore, the Participant agrees to pay the Company or the Subsidiary any Tax Liability that cannot be satisfied by deduction from the cash compensation paid to the Participant by the Company or the Subsidiary. If the Participant fails to make satisfactory arrangements for the payment of any Tax Liability at the time any applicable RSUs otherwise are scheduled to vest, the Participant will permanently forfeit such RSUs and any right to receive payment thereunder and the RSUs will be returned to the Company at no cost to the Company.
8. Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares.
9. No Effect on Service . The Participants service with the Company and its Affiliates is on an at-will basis only. Accordingly, the terms of the Participants service with the Company and its Affiliates will be determined from time to time by the Company or the Affiliate employing or retaining the Participant (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the service of the Participant at any time for any reason whatsoever, with or without Cause.
10. Address for Notices . Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company at 3003 Tasman Drive, Mail Sort HA 200, Santa Clara, CA 95054, Attn: Investor Relations and Stock Plan Administration Manager, or at such other address as the Company may hereafter designate in writing.
11. Grant is Not Transferable . Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.
12. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
13. Plan Governs . This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
15. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.
16. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
17. Agreement Severable . In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
18. Modifications to the Agreement . This Award Agreement constitutes the entire understanding of the parties on the subjects covered. The Participant expressly warrants that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A in connection to this Award of RSUs.
19. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request Participants consent to participate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company. Electronic execution of this Award Agreement and/or other documents shall have the same binding effect as a written or hard copy signature and accordingly, shall bind the Participant and the Company to all of the terms and conditions set forth in the Plan, this Award Agreement and/or such other documents.
20. Authorization to Release and Transfer Necessary Personal Information . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data by and among, as applicable, the Company and the Subsidiaries for the exclusive purpose of implementing, administering and managing the Participants participation in the Plan. The Participant understands that the Company and the Subsidiaries may hold certain personal information about the Participant including, but not limited to, the Participants name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Participants participation in the Plan (the Data). The Participant understands that the Data may be transferred to the Company or any of the Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participants country or elsewhere, and that the recipients country ( e.g ., the United States) may have different data privacy laws and protections than the Participants country. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of RSUs under the Plan or cash pursuant to the vesting of the RSUs may be deposited. Furthermore, the Participant acknowledges and understands that the transfer of the Data to the Company or the Subsidiaries, or to any third parties is necessary for his or her participation in the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting his or her local human resources representative in writing. The Participant further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the RSUs, and his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.
21. Governing Law . This Award Agreement will be governed by the laws of the State of California, without giving effect to the conflict of law principles thereof. For purposes of litigating any dispute that arises under this Award of RSUs or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California , and agree that such litigation shall be conducted in the courts of Santa Clara County, California , or the federal courts for the United States for the Northern District of California, and no other courts, where this Award of RSUs is made and/or to be performed.
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Kenneth P. Wilcox, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of SVB Financial Group; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 7, 2009 |
/s/ KENNETH P. WILCOX |
|
Kenneth P. Wilcox | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) |
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Michael Descheneaux, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of SVB Financial Group; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 7, 2009 |
/s/ MICHAEL DESCHENEAUX |
|
Michael Descheneaux | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT 32.1
SECTION 1350 CERTIFICATIONS
I, Kenneth P. Wilcox, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report of SVB Financial Group on Form 10-Q for the quarterly period ended June 30, 2009, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of SVB Financial Group.
Date: August 7, 2009 |
/s/ KENNETH P. WILCOX |
|
Kenneth P. Wilcox | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) |
I, Michael Descheneaux, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report of SVB Financial Group on Form 10-Q for the quarterly period ended June 30, 2009, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of SVB Financial Group.
Date: August 7, 2009 |
/s/ MICHAEL DESCHENEAUX |
|
Michael Descheneaux | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |